As this week comes to a close, we are looking ahead at future setups that could be some of the best opportunities for the next several trading sessions. Here are some pairs for next week that we are looking at.
Recent data has shown a slow down in the German manufacturing sector. With European economies still working on a recovery, the ECB is hesitant to raise rates, but plans on doing so this summer. However, Japan is experiencing the same thing, yet they are far off from raising rates.
EURJPY looks strong on the 1D and 4H timeframes after a strong uptrend for the past week. Price has support in the 141s as well as the rising trend line on the 4H. The 50 and 200 simple moving averages are also promising support levels for the pair should price move lower. The Edgefinder has even ranked it the highest buy rating at +5.
GBPUSD is another setup that looks promising to the short side. Both the US and UK are fearful of returning to a recession after stagflation. The only difference is that the USD is what investors see as a safe haven while the pound is more speculative. The US is also outpacing England in their attempts to raise rates and curb inflation.
On the 1D timeframe, this pair found a new low and is slowly working up from that level. There is a falling trend line that could serve as resistance as it is also paired with the 61.8% fib retracement zone. Just above that, is the 50 DMA of mild resistance, while the 1.26670s serves as a double top. These were the three short opportunities that look promising. The Edgefinder ranks this pair as the strongest sell rating at -7.
CHF is strong, but the USD is stronger. The SNB's recent decision to hike rates pushed this pair lower while risk-on sentiment added to the dollar sell off. This was an unexpected decision and was the first time the bank hiked in over a decade. The Edgefinder actually ranks this at a -3 sell rating.
The double top on the 1D timeframe suggests heavy resistance as price retraced hard underneath it. However, the pair may have found support on the 61.8% fib level. There is also some additional support below that around 0.94628. The fact that the pair did cross underneath the rising trend line is a bearish sign, so price may continue lower in the meantime.
When it comes to testimonies, it's all in how you say it. Jerome Powell has to be very particular in the way he makes his statements and answers the ensuing questions. Here is what might be in store for the market in the coming days and weeks, and whether or not there will be more downside or not.
Powell's remarks regarding inflation are promising to the value of the dollar in the long run. However, what this means is that capping inflation comes before anything else. In 2020-21, the Fed focused so much of their energy on expanding job growth and the number of hires each month. Now, the Fed has another plan in mind, and that is to control the surging inflation by any means.
The Fed may not be concerning themselves with job growth at all until the inflation target is at or near 2% that they originally forecasted. So, if unemployment were to rise in the meantime, the Fed will continue to focus on hiking interest in order to reach that target.
Powell even goes on to say that it is even trickier to fight high CPI without bringing the labor market down as well.
The Fed chairman continues to drive home his policy towards a 50 to 75 basis point hike for future meetings. This could put the financial market at risk for a recession, but it does not necessarily mean one will happen.
The 'soft landing' strategy they hoped for will probably not happen once things are said and done. So, the market may be rocky on the way to a recovering dollar, and the concern that a recession could happen is still present, but not definite, according to Powell.
We are seeing some mild bullishness from the index after it touched down to the lows from several trading sessions ago. Price is now coming up to resistance on the 1D but could have enough momentum to break upward in the short term. The top of the falling channel could signify where price might turn back to the lows should it move that high. This area would be around the $4000 price level while the strongest support looks to be at the 2020 highs of $3390.
Tomorrow and Thursday will likely be the most volatile days for the USD this week because of the testimony given by Jerome Powell. Here are some things to look out for as well as a couple trade setups that could lead to huge market swings either up or down.
In order for the USD to be more bullish, investors need to be more fearful of a recession as well as further tightening monetary policy. Because inflation is so high, analysts fear that it may take years before we come back to the Fed's original target of 2%. Powell may make remarks about this in the upcoming testimonies, and it would be very important to listen for this when we trade.
Powell will also address current policy towards the inflation cap where he will either stay the course or loosen up for expansionary reasons. If he says that the 75 basis points hikes are likely to continue, we may start to see another rise in USD. The original plan was to bring rates up by a quarter of a percent each time, however, this changed to half and then three-quarters of a percent in the most recent hike.
Should Powell state that in terms of the economy, the US is doing better than they thought, the price of the dollar might fall. Additionally, if Powell says that the economy is in trouble and the Fed wants to loosen policy, we also might see a fall in USD.
The US unemployment rate is another thing to look out for as jobless claims come in on Thursday. Higher unemployment usually means bullishness for the dollar. However, now investors might be looking at higher unemployment/higher jobless claims as bearishness for the USD. This is because the worse the US economy is doing, the more likely it is for Powell to take a less hawkish stance toward the dollar and raise rates at a slower and lesser pace.
This pair on the 1D timeframe has come down to support on a rising trend line. Price also hit the 50% fib level and has been showing considerable rejection from the lows in each of the last three trading sessions. If price bounces from here, we might see the pair go back up to the double top it established in the week before above 1.00000.
Pound-dollar is barely up today after a weak rally to the upside. A strong falling trend line sits right above price which may serve as a short opportunity on the 1D timeframe. Today's candle is already showing signs of rejection from the highs, so there might be selling pressure in the near future depending on how this candle closes. Should price retrace, it could come down to test the lows of 1.19520s.
EURUSD inches higher with the stock market today although momentum is not very strong at open. Price is nearing resistance around the 50 DMA with a 1.07600s resistance level right above that. Lagarde plans to hike twice this summer but the US has already hiked 3 times and plans to reach over 4% interest by the end of the year. This gives USD a bullish advantage over the euro.
We may be entering another volatile week of trading as testimonies from spokesmen of US and Australian central banks are set to happen. Fears of a global recession have investors moving into risk-off currencies and indices around the world fall into bear market territory. In light of the current market condition, here are some of the best trade setups we see going into this week (6/20/2022).
USDCAD is one of the best trending pairs to trade right now as price has moved mostly sideways with a gradual slant upward. As oil prices take a break from its recent surge, the Fed pushed interest rates higher by 75 bp causing growing demand for the dollar. Price has touched a previous high and retraced from the 1.30700s on the 1D timeframe, establishing a double top. However, there is clean support right below in the 1.29680s where price can retest and potentially head back up into the 1.3s again.
Aussie pairs are catching the most volatility today with the RBA governor testimony in focus. Aussie-Swiss fell towards its March highs, but the pair bounced before it could hit a support level around 0.66800s. This support is also coupled with 61.8% fib level on the 1D timeframe which could serve as strong support for the pair should price move lower.
AUDJPY is up 0.55% today on yen weakness. Price came down to test the 50 DMA before rejecting the lows and shooting back up. Higher lows and highs have been established which suggests the uptrend will probably continue. With that in mind, the pair could go back up to test the highs around 96.900s on the 1D timeframe. Additional support lies below around 86.087.
CHFJPY is one of the strongest 'buy' ratings on the Edgefinder today at +4. The Swiss Franc is stronger this week for last week's recent rate hike decision from -0.75% to -0.25% interest. BOJ plans to keep the same monetary policy even though other countries are working to tighten over the next several months. Price jumped again today and is above previous resistance in the 137.800s. There is also a supportive trend line that the pair could bounce off from should price move lower.
GBP/USD is now a -8 strong sell rating on the Edgefinder after unemployment and inflation exceed that of the US. All metrics are red except for GDP growth while the majority of retail is long this pair. Institutional interest is strong on the USD as the number of long contracts increased by 10% last week while GBP long contracts fell by 4%. Fears of an economic recession in both the US and UK point towards heavy risk-off sentiment which gives the dollar a considerable advantage in this situation. The pair just retraced from the recent gains it made in the last week suggesting that price could come down to test the lows again around 1.19392.
After a volatile week of trading, we look to Monday as we attempt to forecast the week ahead. There could still be some rocky sessions ahead. So, here is some fundamental analysis on our trading biases towards the USD major pairs.
The euro has given back some of its gains this morning as risk appetite fades once again. The rumored 75 basis point hike on the US dollar became expected and brought some hope to investors. On the other hand, the ECB is not expected to raise rates any time soon which has investors concerned for the euro. Risk-off still remains dominant in global markets, so the euro-dollar pair may continue to decline in the meantime.
Inflation in both the US and UK have reached 40-year highs while their central government’s take increasingly hawkish stances on their currencies. However, the Band of England couldn’t mimic the same hike in rates as the Fed which could be considered bearish for the pair. Both countries are in similar economic conditions, so it looks like the USD will be preferred over the pound because the UK couldn't match the Fed’s 75 basis point hike.
Aussie-dollar showed very similar price action behavior towards the FOMC decision and is now giving back most of its gains from the last two trading sessions. Fundamentals for this pair are the same for EURUSD and GBPUSD. The dollar looks stronger due to the more combative approach by the Fed than other countries.
Bias: Neutral, Bullish-leaning
The dollar has been extremely bullish against the loonie as oil prices decline. The commodity-driven economy has been showing more growth than in the US as the Canadian central bank works towards tapering while continuing with their tight policy. With the current shortage in supply and high demand for oil, Canada might still be able to have a leg up on the dollar, so the pair may have some volatile oscillations.
Dollar-swiss sank prior and during the SNB’s rate decision that brought interest from -.75% to -.25%, a 50 basis point increase. Yesterday’s drop could have been overblown as the USD still remains strong in many aspects. However, the Swiss Franc does look strong when matched against currencies like the yen, the euro, and buck which are lagging on their monetary tightening process.
On June 15th, yesterday afternoon, the Federal Reserve released the Federal Open Market Committee’s (FOMC) latest Summary of Economic Projections, coupled with their corresponding statement. They revealed that the FOMC had decided to raise the Federal Funds Rate by a whopping 75 basis points (bps), to a range between 1.5-1.75%; such a hike has not been seen since 1994. Upon this news, and ostensibly in response to Federal Reserve Chair Jerome Powell’s press conference afterwards, financial markets saw a great deal of volatility. The US Dollar Index (DXY) made gains before closing lower at 104.66, while the Dow Jones oscillated between 30,000 and 31,000 before closing slightly higher. Today DXY continues to sink lower as the Dow abandons yesterday’s gains, falling over 800 points intraday, below 30,000. With this context in mind, let’s unpack this as we learn 4 lessons from FOMC yesterday.
1) The Fed is Becoming Increasingly Hawkish
The 75 bps rate hike decision was somewhat shocking. Though an increasing number of analysts began predicting it earlier this week (with speculation about a supposed leak occurring), such an aggressive measure is rare by contemporary standards. Powell made it clear the bold decision was taken in response to May’s hotter-than-expected inflation data, a disturbing 1% CPI increase month-over-month, or 8.6% year-over-year. Though this had not been the FOMC’s intention prior to this information, Powell emphasized that they are willing to roll with the punches and are open to further aggressive measures so long as inflation remains a serious threat.
While he did convey that they will be planning each hike on a case-by-case basis contingent upon inflation reports, he seemed to be signaling that the Fed’s responsibility for price stability must temporarily take precedent over currently maximizing employment, that it might be maximized long-term. This reflects the tone of the hawkish FOMC statement as well, factoring into the aforementioned economic projections, which anticipate increased unemployment, slower growth, and at least a 3% Federal Funds Rate by the end of 2022. While invariably negative news for the stock market, this is perhaps more ambiguous for USD than it appears at face-value, since a seemingly positive hawkish agenda may be undercut by worsening economic expectations.
2) Powell is Unpredictable (Even to Himself)
A generous interpretation of Powell’s decision and rationale is that he reacts swiftly to the latest information. A more cynical interpretation, which some of the questions at the press conference reflected, is that he is fickle and erratic, indicating one set of monetary policy plans before scrapping them for new ones. After all, today’s hawkish FOMC Chairman is nearly unrecognizable from the COVID-era Powell who was fixated on economic stimulus and near-zero interest rates.
However, to Powell’s credit, he is rather self-aware on this matter. He was transparent yesterday about the fact that he is entirely unsure to what extent each rate hike will cool the overheated US economy, particularly in light of pervasive supply chain issues and externalities due to the invasion of Ukraine. These are holistically unusual circumstances, and the FOMC is confined to conducting an ongoing sequence of interest rate experiments to eventually establish an inflation solution. Though honest, this degree of transparency has likely not helped the public or markets gain trust in the Federal Reserve, and thus may have contributed to today’s securities selloffs.
3) Leave Room for Baffling Market Reactions
Upon reading the statement and watching the press conference, the Fed’s intentions left little room for interpretation in my eyes, striking me as hawkish in a clear-cut fashion. While Powell did leave some wiggle room for less aggressive responses if future CPI reports reflect inflation slowing down, he made it quite clear that more 75 bps hikes are on the table, even likely. Taken altogether, all the information provided yesterday appeared overwhelmingly bullish for USD, and bearish for stocks. While yesterday saw another bout of odd buying pressure for stocks upon the rate hike news, today’s decline is unfortunately a more understandable return to form.
However, DXY is down over 1% today intraday as USD plummets in value against other currencies. Despite today’s news on higher-than-expected US unemployment claims, as well as worsening economic conditions according to the Federal Reserve Bank of Philadelphia, this USD outcome has been surprising. Although economic expectations in the US are becoming gradually bleaker as recession fears grow, I had imagined that demand for USD due to huge rate hikes and persistent inflation would have outweighed selling pressure. While I am still anticipating this to be the case, it is helpful to remember that there is no certainty in the markets, and every bullish or bearish signal must be taken with more than a grain of salt.
4) Technical Analysis Still Matters
One factor that likely aided selling pressure for USD was how much buying pressure it had encountered in the days leading up to FOMC, perhaps in anticipation of the suspected 75 bps hike. This bullish momentum reflected in USD pairs, many cases of which led price action to a key level of support or resistance. Touching these levels, in conjunction with how overbought USD was purely from the standpoint of various technical indicators such as the Relative Strength Index and Keltner Channels, was a good recipe for price action reversing course.
This FOMC news is thus a great case study in (seemingly) straightforward fundamentals not exempting traders from having to conduct technical analysis. Even if foreign exchange markets favor USD bulls in the long run, bullish momentum will still almost certainly pause here and there while bears exhaust themselves. If this is the case, such a pause taking place at the intersection between key support/resistance levels and big central bank news was the perfect point to do so.
Global inflation, company layoffs, economic sanctions, geopolitical conflicts and so on have investors shuddering from the thought of investing. Volatility has picked up well beyond expectations as recession fears loom in the forefront of everyone's mind. With all these issues, it's hard to tackle markets when we have been so used to different monetary policy, risk-on sentiment and economic growth. As the FOMC meeting is just over the horizon, it is important to brush up on key concepts to help us prepare for market uncertainty. So, here are some ways to make money trading during turbulent market conditions.
Due to ever-changing market conditions, examples of risk-off pairs tend to change as well. Risk-off currencies basically are the ones that perform better in times of uncertainty, economic struggles, hawkish monetary policy or high inflation.
Here is a list of risk-off currencies that tend to do better in recessionary times:
Historically, these currencies have been considered 'safe haven' investments when the economy is suffering. USD has always been a safe haven because of the Federal Reserve and their decisions impact the global financial market. Ever hear of people making Swiss bank accounts to shield their money (or keep it hush-hush)? The Swiss Franc is considered risk-off because of it expendability with debt. As a constantly profitable and small economy in the financial sector, the Franc never really gets into deep waters like Germany, United States, Canada, Euro-Area, etc. which are much larger economies. Lastly, when US stock markets fall, the yen tends to appreciate, making JPY a historically profitable play in poor economic conditions.
Here is a list of all the risk-off major pairs that would perform well/poor if a global recession were to happen now:
You might have noticed that USD/CAD is not on the list. That is because the Canadian economy has been very strong as of recent. Their jobs data is better than the US and most other countries while the oil-dependent economy has benefitted from sanctions on Russia and supply-chain shortages. Overall, if the energy crisis on oil continues, the loonie will persist, but if oil prices fall, USD will overtake CAD.
Because of the Fed's impact on the world financial system, USD will continue to be strong especially if it's central bank continues to raise rates like it has been doing so far this year. Gold is also on the bullish list because of its extraordinary circumstance. Due to reasons mentioned in this article about gold, we think a recession would be a good opportunity to start building positions on gold for the long term.
The process of trading in a recession can either be through the use of short term or long term plays. GBP/USD and EUR/USD tend to follow the US stock market (SPX500 or NAS100). If you have ever traded these indices, you would know how volatile they can be on a regular basis. This volatile behavior is mildly reflected on the pound and euro when it is up against the USD, but the correlation is generally the same as the SPX500. If one was to trade GBP/USD or EUR/USD, quick short plays might be the best option. Ranging plays would also work, but there might be heavy ups and downs along the way.
All forex pairs enter into long-term swings either to the upside or downside. But, some pairs like to take exuberant amounts of time in a single direction before changing course. These pairs are AUD/USD, NZD/USD, USD/CHF & USD/JPY.
Similar to the pairs just mentioned above, gold is another example of an asset that takes a long time to move, allowing for investors to build large positions over time. Commodities like gold also tend to perform their best during economic declines.
While there are many currency pairs worth buying and selling in the foreign exchange markets, often pairs worth watching fly under the radar of retail traders. The EdgeFinder, an A1 Trading tool for traders aiming to holistically bolster their analysis skills, is helpful for identifying such opportunities for trade setups. As we wait for tomorrow afternoon’s big FOMC news, today we will look at a unique pair: USD/TRY, the US Dollar Turkish Lira pair. It is the only one that the EdgeFinder currently evaluates as being strongly worth buying, and we will discuss why. We will employ fundamental, technical, and sentiment analysis as we assess this 1 pair worth buying.
In terms of fundamental analysis, data is disproportionately bullish. Although Turkey has experienced recent GDP growth while US GDP has contracted, the Turkish lira has suffered a near-collapse in value, with year-over-year inflation currently at an unbearable 73.5%. Although the Central Bank of the Republic of Turkey (CBRT) currently has interest rates around 14%, this has not been enough to successfully mitigate economic suffering, as stagflation persists and unemployment hovers in the double digits. Tensions between Turkish President Recep Tayyip Erdoğan and the CBRT regarding monetary policy have not helped. Thus, in this unusual and tragic case, substantially higher interest rates than the US is not a bearish signal for this pair.
Technical & Sentiment Analysis
In terms of technical analysis, the pair has been trending upwards for years. 2021 saw a staggering breakout to the upside, reaching a high over 18, then selling off to below 11 before price action found support and resumed trending upwards. Price action is currently testing these previous resistance zones again, with weighted moving averages functioning as support while a breakout to the upside seems likely. In terms of sentiment analysis, according to the latest COT data, over 75% of institutional traders are long on USD, while such information is not available for TRY. Meanwhile, only 25% of retail traders are long on this pair, another bullish signal. In light of the economic pessimism in Turkey due to the lira’s instability, sentiment for the pair seems strongly bullish.
Potential Trade Setups
The Edgefinder gives USD/TRY a score of 6, earning it the software’s only ‘strong buy’ signal. However, I hope everyone will nonetheless be careful trading this pair, as it has often been extraordinarily volatile. Using small positions and careful stop losses would be particularly wise here. In terms of possible points of entry, conservative traders could wait for tomorrow’s FOMC news as a potential bullish fundamental catalyst.
Even if the news unexpectedly means a surprisingly bearish turn for USD, you could still potentially use the new selling pressure to wait for a retest of the 16.5 zone as support. Given the unfortunate economic circumstances influencing TRY, even bearish news for USD would likely not have the same long-term implications for this pair as for others.
FOMC economic projections, a statement from Powell, and the interest rate decision is happening tomorrow. The forecast has already been out for a while, however, there are some speculations as to whether the Fed is going to get more aggressive or not. Here is what we think and what to consider, as well as what might happen if the rumors are true.
The US central bank is set to raise interest rates multiple times this year, and they have already done so for the past several months. So far, we've seen two hikes since <0.25%; one took funds to 50 bp and the second took it to 100 bp (1%).
With inflation as out of control as it is, economists speculate that the Fed will try their best to step in front of it but will need to take a more offensive approach. Rumors of a 75 bp hike were floating around, but it is not to say for certain that this will happen. However, here are some reasons as to why we could such a boost tomorrow.
To reiterate some points from yesterday's article on gold and why it could be a better pick than the dollar, the US economy is experiencing a slow in GDP growth as businesses and consumers alike are cutting back on their spending. Workplaces have been conducting a concerningly higher number of layoffs in the month of May and June.
The problem the US and most of the world is facing are consequences from quantitative easing stemming from the pandemic in 2020. Inflation has hit a 40 year record and there doesn't seem to be any sign of stopping. Thus, if the Fed really wanted to advance in this assailment on lowering CPI, three quarters of a percent might be justified.
What makes this circumstance so complicated is that the Fed doesn't want to abandon their 'soft landing' strategy where the market can ease into the waters while slowly adjusting to new monetary policy. If this shift happens too fast, the economy might enter into a recession- businesses will have to cut back on their employees and spending. However, if they don't act quick enough, inflation will force companies and consumers to cut back expenditures as well.
Holistically, policy needs to hit a sweet spot, but it's tough to find that middle ground. Considering what is going on right now in the market (jobs in May and June have cut several thousand workers at an alarmingly higher rate than the past 6 months), the Fed is running out of time and options. It's probable that the bank will go for this inflation curb ASAP and have to deal with the negative outcomes that follow in the short term.
UJ pushes higher today as investors anticipate the open market committee's decision tomorrow. Price climbs higher towards the 135.200s on rocky behavior in recent days. A supportive trend line lies below with a support level right beneath that.
EU returned the gains it made in the last couple days off a bounce from mild support on the 4H. Price looks like it might be able to continue a move lower to the 1.03700s support zone. Momentum is so hard to the downside that the pair might complete this move to support before seeing any kind of bounce.
AU is similar to EU as it looks to complete that move to the downside on to support in the 0.68500s. Heavy resistance has kept the pair from being able to shift momentum as it is currently in a steep decline from the June highs near the 0.73000s. Price will likely test that bottom before seeing any kind of move to the upside with potential. It might even break to lower lows.
Most weekdays offer the release of a flurry of economic data that can influence price action in the financial markets. Due to the surplus of information available, it can be difficult to parse and locate which indicators are most helpful in terms of fundamental and sentiment analysis. Here, we consider key economic news on June 14th, which I will be keeping in mind for identifying fundamental catalysts, preparing for future volatility, and devising trade setups.
GBP: Another Day of Bad News
The United Kingdom received disappointing new unemployment and employee earnings data from the Office for National Statistics this morning at 2 am Eastern Time. The UK’s Average Earnings Index failed to meet forecasts, while the unemployment rate ticked up by an unexpected 0.1% as more workers filed for unemployment benefits than anticipated. This comes on the heels of yesterday's pessimistic news for the UK, including a shocking month-over-month GDP contraction and a worse trade deficit than what was forecast.
Things are not looking up for GBP; the UK’s economy is clearly not performing well, yet the Bank of England (BoE) is forced to attempt to reckon with high inflation numbers while not causing a recession. This is holistically bearish for GBP, with a mild 25 bps rate hike and Monetary Policy Summary from the BoE expected on Thursday at 7 am Eastern Time. Traders could look to continue shorting GBP beforehand, wait for Thursday's fundamental catalyst(s), or perhaps attempt to buy GBP/JPY as the pair may be erroneously oversold on GBP disappointment.
Month-over-month German CPI data came in at precisely what was forecast, 0.9%; however, economic sentiment in Europe came in bleaker than expected today according to the ZEW survey(s). US Producer Price Index (PPI) numbers, another metric for inflation, also met forecasts at 0.8% month-over-month, though Core PPI (which excludes food and energy prices) failed to meet expectations by 0.1%. However, this is secondary for USD as tomorrow’s FOMC news remains the focus. China’s year-over-year retail sales and industrial production numbers are also scheduled to be released tonight at 10 pm Eastern Time, along with their unemployment rate.