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.
Key Takeaways
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.
Fundamental Analysis
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.
Key Takeaways
Price action for USD pairs was fascinating today as the DXY reflected bearish momentum that saw a low of nearly 102.15 intraday. This selloff was stopped at approximately 8:30 a.m. Eastern Time when eager buyers sent it soaring, eventually over the 103.3 level. Several factors were at play here, including important European Central Bank news and expectations for new US CPI data tomorrow. I took this opportunity to trade USDCHF this morning; it went well, and I entered and exited the trade in under an hour. Below I explore my process, and why I day traded USDCHF.
Fundamental Analysis
In many ways, the fundamentals favor CHF: Q1 GDP growth in Switzerland was positive unlike for the US, unemployment is 1.5% lower than in the US, and year-over-year inflation is gradually climbing. However, the Swiss National Bank currently has its key interest rate at -0.75%, compared to the Federal Reserve’s 1%, which involved a 50 basis point rate hike. On top of this, both CHF and USD are historically safe haven assets, and USD has encountered recent bearish data and increased chances at volatility due to upcoming US CPI data (perhaps indirectly through today’s ECB announcements as well). Thus, I decided I felt comfortable enough to go long on USDCHF as a day trade, but not confident enough to sit in it for too long.
Technical Analysis
I felt that there were enough technical indications here to warrant a brief long position. On the 1-hour timeframe, the price moved rapidly outside the Keltner Channel walls, and met significant support in two places: the 0.972 zone and the trendline pictured. I interpreted this bearish candlestick as a hasty reaction to meeting resistance around 0.98 (a reaction that could be short lived in light of potential for USD volatility). Thus, I entered at the 0.973 level, and took profit just above the 0.978 level, since I was not confident it could break through 0.98 resistance.
Sentiment Analysis
Sentiment analysis also made me feel comfortable entering the position. According to A1 Trading’s EdgeFinder, recent COT data reveals 76% of institutional traders going long on USD, whereas just over 10% are going long on CHF. In contrast, less than 1/3 of retail traders are long on this pair. These are all incredibly bullish signs for USDCHF, making me feel confident in my purchase, especially as Switzerland grapples with neighboring eurozone issues and with today’s arguably banal ECB decision. However, given my aforementioned uncertainties about the pair’s fundamentals and mutual safe haven status, I still planned on an early exit.
Key Takeaways
