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.
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.
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.
US financial markets started the week in unpleasant fashion as stocks and Treasury notes sold off rapidly. The Dow has fallen over 800 points intraday; the S&P 500 is likewise down over 3%, or over 20% from its January high, with its transformation into a bear market being actualized. Treasuries briefly experienced a yield curve inversion as the yield on the 2-year note exceeded that of the 10-year note, an indication of impending recession, while yields for both securities reach decade-long highs. Meanwhile, DXY crossed above the 105 level as demand for USD grows before the Federal Open Market Committee’s (FOMC) rate hike decision on Wednesday afternoon. In preparation for Wednesday’s volatility, let’s discuss what the FOMC decision could mean.
Possibility #1: Market Expectations Met
Most analysts are currently anticipating a 50 basis point (bps) rate hike for the federal funds rate on Wednesday, which would put the target interest rate at 1.5%. However, potentially more impactful than the rate hike itself will be the FOMC press conference afterwards, and what details about future hikes Chairman Jerome Powell opts to reveal to the public as inflation and recession concerns mount. Given the importance of his comments, 50 bps hike expectations being met may not matter to the markets in light of the set of new expectations he generates.
Possibility #2: More Hawkish Than Expected
This could take at least two forms, such as a) an aggressive 75 bps increase to the federal funds rate on Wednesday, which some analysts are speculating, and/or b) Powell hinting at even further accelerated hawkishness to quell hyperinflation concerns. With this past Friday’s reveal of year-over-year US inflation being at 8.6% and considering the Federal Reserve’s consistently hawkish disposition in recent months, these could be plausible. This would signal continued bullishness for USD and bearishness for stocks.
Possibility #3: More Dovish Than Expected
This could similarly take at least two forms, including a) a mild 25 bps increase to the federal funds rate on Wednesday, which few analysts seem to be speculating, and/or b) Powell hinting at a return to dovishness to mitigate recession fears. With companies and investors facing plummeting share prices, coupled with Powell’s original comfort erring on the side of protecting employment over staving off inflation, this may be more possible than many think. This would signal a sudden departure from USD bullishness and would likely restore demand for stocks.
This morning saw demand for USD rapidly pick up steam as US inflation data came in hotter than expected. Month-over-month CPI had been forecast to rise by 0.7% in May; at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed that it had increased by 1%, or 8.6% year-over-year, a forty-year high. Likewise, Core CPI (which excludes food and energy prices) was forecast to rise by 0.5% month-over-month, instead hitting 0.6%. On this news, the DXY is up 0.8% and has risen over the 104 level intraday, as EURUSD is down 1% and the S&P 500 is down nearly 3%. With this context in mind, let’s discuss 3 ways to capitalize on inflation now.
Trade Major Pairs
This CPI news is a huge fundamental catalyst for USD pairs since it verifies that the US economy is indeed still overheating, validating further interest rate hikes by the Federal Reserve. This is very bullish for USD, which makes buying the USD against other currencies even more appealing. If traders are searching for optimal USD pairs to take positions in, a good place to start is by locating pairs where analysis leans in USD’s favor to the greatest degree possible.
Some such options include a) shorting GBPUSD and EURUSD, which receive -7 (‘strong sell’) and -5 (‘sell’) signals, respectively, from the EdgeFinder, and b) going long on USDJPY, which receives a 4 (‘buy’) EdgeFinder signal. Because USD experienced so much buying pressure this morning, conservative traders may want to find an opportune point of entry by conducting technical analysis, e.g., waiting for a pullback and retest of key support/resistance.
Though admittedly a controversial opinion, I am waiting for an optimal point of entry to purchase gold against USD. XAUUSD experienced quite the selloff this morning before a startling recovery, jumping from a low of 1825 to hovering around 1855 at the time of writing this. This jump was seemingly prompted by finding support around the 1830 level, a clear zone of support on a 1-hour timeframe.
I interpret fundamentals being bullish for XAUUSD due to demand for the precious metal in several different industries and its historical status as a safe haven investment in times of economic crisis. There have been periods where gold’s rise in value does not correlate with USD depreciating in value, which is helpful to consider in cases like these. According to the latest COT data, institutional traders are similarly long on both USD (76%) and gold (73.56%). I am planning to purchase XAUUSD if price action retests the trendline depicted on the 1-day timeframe above, though this opportunity may not come if demand continues to grow quickly.
Invest in the Stock Market
Though it may seem strange in the face of persisting hyperinflation and potential for recession, economic downturns and stock selloffs do present myriad buying opportunities for long-term investors. If you are not planning on retiring for decades, you can utilize dips in the stock market and indices to build wealth over time, assuming you are willing to sacrifice immediate results. For example, when the Dow plummets over 600 points like it has today, investors can seize these events as opportunities for cheap purchases that will yield returns years down the road.
If your investment portfolio keeps crashing in the meantime, this does not have to be discouraging since they are merely unrealized losses; they will likely grow in value through the decades if you are invested in index ETFs and other trustworthy funds. Any further selloffs present even more opportunities for regular, small purchases. (However, investing in individual stocks is a completely different story, and I personally believe that even the most skilled retail investors are not sufficiently equipped to handle the inherent risks involved.)
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.
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.
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 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.
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 today, which I will be keeping in mind for identifying fundamental catalysts, preparing for future volatility, and devising trade setups.
Euro Area: Monetary Policy Statement & ECB Press Conference
This morning the European Central Bank (ECB) made plain their monetary policy intentions: they will be ending their quantitative easing program with the start of July and implementing an interest rate hike of 25 basis points that month as well, with another identical hike scheduled for September. This caused a great deal of volatility for EUR this morning, with buying pressure spiking before quickly being overtaken by bearish momentum. This is likely because, despite a change in tune from the ever-dovish ECB, the markets had already anticipated these plans, and the ECB’s key rate will remain in the negative even after July’s hike.
United States: Unemployment Claims & Natural Gas Storage
The past week saw 229,000 American workers file for unemployment claims, while only 205,000 claims had been forecast. An additional 97 billion cubic feet of natural gas was held in US storage this past week as well. Both data suggest a slowing US economy with more unemployment and less consumer spending, which is bearish news for USD. However, this information is merely the prelude for tomorrow’s CPI and Core CPI data month-over-month, expected from the Bureau of Labor Statistics at 8:30 a.m. Eastern Time. With economic health teetering in response to the Federal Reserve’s pivot towards hawkishness, tomorrow’s inflation data may be a significant fork in the road for USD. The DXY is currently surging today, clearing and then hovering around the 103 level intraday.
Canada: BOC Financial System Review
This morning the Bank of Canada (BOC) released their annual Financial System Review, in which they analyze Canada’s economic wellbeing and any significant threats they are wary of. They revealed particular concern about the effect of rate hikes on the global economy, as well as its effect on those in Canada contending with high household debt and a hot housing market. While they covered a broad variety of topics including cybersecurity and climate strategy, I personally interpreted the report as being rather dovish, though they did express less concern about the effect of rate hikes on Canada’s non-financial businesses. This may have prompted some of the CAD bearish momentum we saw this morning.
China: CPI (year-over-year)
Due tonight from the National Bureau of Statistics of China at 9:30 p.m. Eastern Time, China’s CPI is expected to hit 2.2% year-over-year, though CPI data from the past two months have surpassed forecasts. Considering yesterday’s report on China’s monthly trade balance exceeded forecasts by over $20 billion, it seems plausible that tonight’s CPI data will likewise reflect a booming economy. Though CNY functions somewhat differently than other currencies due to more centralized control of its value and limited access for traders and investors, it is helpful to monitor China’s economy as its performance has global implications regarding trade imbalances and industrial competition.
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 explore a selection of important economic news today, which can be helpful for identifying fundamental catalysts, prepare for future volatility, and devise trade setups.
Japan: Economy Watchers Sentiment
Released by Japan’s Cabinet Office at 1 a.m. Eastern Time, this indicator gauges economic sentiment in terms of consumer spending by surveying a few thousand service workers in Japan’s economy. Anything over a score of 50 indicates economic optimism; the forecast had been 51.9, but the actual report was 54. This would usually indicate strength for JPY, as it could help push the Bank of Japan towards tightening monetary policy. However, considering their willingness to continue extreme dovishness, I interpret this as a bearish signal for JPY, since the BOJ may feel further emboldened by economic optimism to extend low interest rates.
Euro Area: Final Employment Change & Revised GDP (both q/q)
Released at 5 a.m. Eastern Time, both metrics of economic health were better than previously expected: employment was forecast to increase by 0.5% and ended up increasing by 0.6%, while GDP growth also clocked in at 0.6%, double the percentage expected. These especially contribute to a bullish case for the EUR, since the Euro Area is clearly dealing with an overheated economy, and the European Central Bank seems primed to potentially act and pivot into gradual hawkishness. We will be hearing from the ECB tomorrow.
United States: Final Wholesale Inventories (m/m) & Crude Oil Inventories
Released at 10 and 10:30 a.m. Eastern Time, respectively, these two indicators may showcase some signs of a slowing US economy. According to the Census Bureau, there was a 2.2% increase in the value of goods in stock for wholesalers, where only 2.1% was expected. This reveals supply of such goods outpacing demand in an unexpected fashion. Likewise, according to the Energy Information Administration, the number of barrels of crude oil held in inventory by commercial firms increased by 2 million, whereas a change of -2.6 million had been expected. With crude oil already at staggering price levels, this indication of slowing demand has further implications throughout the US economy, perhaps as a proxy for consumer spending elsewhere. This is bearish news for USD.
China: USD-Denominated Trade Balance
Tentatively due today, the CGAC will be releasing data on China’s trade balance, which is frequently a surplus to some degree. While China is forecast to have net exported $58 billion, it could exceed expectations like prior months, despite China’s recent zero-COVID policy measures which limited economic activity. Not only do these growing margins signal CNY strength and continued economic growth for China, they also ostensibly indicate lower growth expectations for trade partners and economic competitors, such as the US, due to corresponding trade deficits. This information will come on the heels of lowered global economic growth forecasts from the World Bank and the OECD.
The beginning of June 2022 marks the planned start of the Federal Reserve’s Quantitative Tightening (QT) program, a contractionary monetary policy tool intended to help curb hyperinflation in the US by reducing the money supply. Implemented in conjunction with the Federal Reserve’s plan to continue raising the federal funds rate by 50 basis point increments, this is a decisively hawkish agenda that will likely have an acute impact on the financial markets. Let’s explore further as we issue a warning: QT starting now.
A Brief History of QE/QT
QT is the ‘sibling’ program of Quantitative Easing (QE), its expansionary counterpart. QE is essentially a large-scale financial asset purchasing program that central banks utilize when their economy needs to be stimulated due to lower consumer spending, i.e., a mode of ‘money printing’. QE entails a central bank purchasing government bonds, mortgage-backed securities, and other assets to increase the money supply, creating new liquidity to encourage more lending, investment, and spending. QT has been described as the opposite of QE in the sense that it entails a subsequent central bank balance sheet reduction, effectively reducing the money supply and removing excess cash reserves to cool an overheated economy.
While the Bank of Japan is widely credited with pioneering QE in the early 2000s, the expansionary strategy was popularized by central banks around the world during the 2008 financial crisis. It saw even wider use in early 2020 onward, in attempts to combat global COVID-era economic catastrophe. However, despite its worldwide popularity, both QE and QT remain in their infancy, and are thus regarded as somewhat experimental programs.
Differences from QT in 2017
The last time that the Federal Reserve implemented QT was to reduce the size of its balance sheet back in 2017, after it had built up a (then) unprecedented $4.5 trillion portfolio. They began letting their securities mature gradually, starting around $10 billion per month and eventually quintupling that pace over the next few years. These measures, in conjunction with periodic interest rate hikes, correlated with relatively stable growth in the US economy.
Several variables have changed this time around: first, the rate hike agenda is far more aggressive than it was five years ago: Chairman Powell has made it clear that 50 basis point hikes are on the menu for now, a departure from the more modest 25 bp hikes of the past. The timeline for hikes is more rushed than in 2017 as well. Second, this iteration of QT’s pace is quicker as well, with security maturation caps expected to near $100 billion per month by the end of this year. This seemingly corresponds with the Fed’s balance sheet being just under $9 trillion this time, near double that in 2017. Third, the US economy does not seem to be weathering this transition well, with a 1.5% contraction in Q1 GDP and a sharp drop in value for the US stock market (in part due to supply chain issues, ubiquitous hyperinflation, and volatile geopolitical tensions).
The truth is, we are effectively in uncharted waters, so it is virtually impossible to know what consequences QT (or QE, belatedly) will ultimately have. However, considering our limited experience with it, one of two outcomes seems most likely: 1) QT will have an apparently mild/neutral effect on the US economy, to the point that its shrinking of the money supply is nearly imperceptible for buyers and sellers. Considering its historical correlation with economic growth, there is even a chance it could be seen as a slight bullish fundamental catalyst for the US stock market, a harbinger of the end of hyperinflation risks and woes.
2) Aggressive QT, concomitantly with rapid consecutive 50 bp rate hikes, will contribute to a recipe for recession in the US, encouraging investors to shy away from riskier securities in favor of government bonds, USD, and other safe haven assets. While this scenario seems most likely to me, today’s higher-than-expected NFP numbers showcase a resilient US economy and may have given the Fed more breathing room to pursue this hawkish agenda without recession looming. We will have to patiently keep tabs on other indicators going forward to monitor this.
USDJPY saw a return to strong bullish price action this week as the pair jumped over 300 pips higher intraweek from Monday’s opening price of 127.13. This momentum has occurred despite recently released, better-than-expected economic data for Japan, including low unemployment numbers and higher retail sales figures year-over-year. At the time of writing this, USDJPY sits at 129.79 as buying pressure stalls today. Let’s take a closer look as we explore why USDJPY is still worth buying.
Japan’s economy is in a relatively unique situation compared to the US. At first glance, there appear to be many bearish fundamental indications for USDJPY: Japan’s unemployment rate is an impressive 2.5% (compared to 3.6% in the US), inflation has been climbing consecutively month-over-month, and the quarter-on-quarter GDP contraction in Japan was 0.2%, far less worrisome than the 1.5% contraction in the US.
However, this information is all secondary in light of the Federal Reserve’s hawkishness, as they pursue tight monetary policy through steadily raising benchmark interest rates to cool the overheated US economy, where year-over-year inflation is currently 8.3%. The Bank of Japan, on the other hand, is continuing their ultraloose monetary policy strategy; they are keeping their key short-term interest rate negative, as year-over-year inflation clocks in at a tolerable 2.5%.
In light of this contrast between urgent hawkishness and comfortable dovishness, with both tailored to their countries’ respective inflation threats, the biggest signs point to continued bullish momentum for USDJPY. If traders are waiting for a fundamental catalyst to determine an optimal point of entry, the Bureau of Labor Statistics is revealing further significant employment and hourly earnings data for the US tomorrow, June 3rd. I am personally waiting for this news before entering a long position.
Despite a three-week downtrend, when looking at USDJPY at a 1-week timeframe, there appears to currently be little for bulls to be concerned about. After bullish momentum caused a massive breakout to the upside of the historic 126 resistance zone, not visited since 2015, price action has retested the zone as support, nearly in conjunction with 9 EMA. This retest has since been followed by a renewed surge in buying pressure, which has seemingly paused only in the face of today’s disappointing ADP Non-Farm Employment Change numbers in the US. As these support levels continue to hold, a continuation of the years-long bullish trend seems probable.
While sentiment analysis can sometimes be tricky to conduct due to ambiguity in COT data and uncertain economic climates, there is little nuance to be found in this case. The stars have aligned as the most recent COT reports show over 77% of institutional traders going long on USD, while only 12.5% are going long on JPY (though this is an increase of nearly 3%). This pairs well with retail sentiment, with only 23% of retail traders currently long on USDJPY, a bullish indication. This data is courtesy of A1 Trading’s EdgeFinder, a helpful tool for any trader aiming to improve their analysis.