The RBA rate decision took the markets by surprise. The consensus expectation was that the central bank will increase the interest rate from 0.35% to 0.60% but the hike was as big as 0.50% to 0.80%. This rallied the pair initially but pretty quickly the move was faded by traders and the AUDUSD pair moved all the way back to pre-announcement levels. In RBA’s view, the Australian economy is strong enough to take aggressive rate increases. The central bank says that it will do what is necessary to ensure that inflation in Australia returns to target over time although RBA expects inflation to increase further. Elsewhere, GBPUSD is trading below a key support level after 148 MPs voted against Prime minister Boris Johnson yesterday speculations of his resignation have increased. This weakens the pound. The next key risk event is Canadian Ivey PMI. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
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AUDUSD – The RBA rate decision took the markets by surprise. The consensus expectation was that the central bank will increase the interest rate from 0.35% to 0.60% but the hike was as big as 0.50% to 0.80%. This rallied the pair initially but pretty quickly the move was faded by traders and the AUDUSD pair moved all the way back to pre-announcement levels. Now that the dollar has been strong and there have been some signs of risk aversion creeping into the markets it will be interesting to see how all this balances out. On one hand, we have a strengthening USD and on the other RBA has shown it’s ready to hike the rates substantially in order to counter the rising prices. I think today’s price action will be in an important role. If the market doesn’t trade decisively below 0.7141 it’s still in an uptrend. If however, there’s a sell-off and the 0.7141 is violated we might see the market slipping down to 0.7060 or so.
EURUSD – My trade idea for this market was to look for sell signals if there’s a decisive break below the support at 1.0704. This far EURUSD has failed to rally above the level and provided us with some good trading opportunities. My target level for EURUSD is at 1.0642 and is valid as long as the pair stays below the 1.0704 support. Alternative scenario: The market fails to stay below the support level and rallies to 1.0804.
GBPUSD is trading below a key support level (1.2458). The market has created a lower high which increases the probability of this support giving in. After 148 MPs voted against Prime minister Boris Johnson yesterday speculations of his resignation have increased. This weakens the pound. Also, if the dollar strength continues and the level breaks we could see a move to 1.2336. If the market trades decisively below the 1.2458 support I look for short entry signals with my T1 at 1.2400 and the T2 at 1.2336. Alternative scenario: The support does hold and the market rallies to 1.2589.
DAX – I expected this market to rally to Friday’s high yesterday as the market was quite bullish. This happened and the high was penetrated but the index couldn’t hold the levels above it. Now DAX has retraced back to an intraday support at 14521 but yesterday’s weakness in DJIA and Nasdaq caused by the dollar strength (rising yields) is concerning. There’s a bearish wedge in DAX 8h chart but the market is still in an uptrend above the 14440 support. The nearest key S&R levels are at 14398, 14440 and 14711.
USOIL – I said yesterday that this market was a candidate for long trades on pullbacks and gave you the nearest key S&R levels. USOIL retraced the 115.95 (one of the levels I pointed out yesterday) and rallied nicely. This was a great opportunity to go long oil. Hope you made some points! Oil still has both fundamentals and technicals favouring the bulls. Therefore it makes sense to look for long trades as long as there’s no change in these market drivers. Alternative scenario: USOIL sells off and breaks the rising trendline (currently) at 111.25 decisively, then we could see a move to 108. Therefore the market stays bullish above 111.25.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed hiked by 0.5% in May but according to Powell 0.75% hikes are off the table.|
|Stimulus||The Fed is looking to scale down its bond-buying program (QE) but has signalled that it be careful with tightening due to the war in Europe.|
|Yields||The US 10-year treasury yield has been drifting lower since early May as equity investors have moved over to T-Bonds in search of safety.|
|Employment||The May non-farm payrolls increased by 390K (436K previous) while the participation rate was confirmed at 62.3% (62.2% previous). The unemployment rate remained unchanged at 3.6%.|
|Inflation||The US annual inflation growth for April slowed down and came in at 8.3%. This represented a 0.2% drop from the 41-year high of 8.5% in March. It was, however, above the analysts-predicted number of 8.1%.|
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The Next Main Risk Events
- CAD – Ivey PMI
- EUR – Main Refinancing Rate
- EUR – Monetary Policy Statement
- EUR – ECB Press Conference
- USD – Unemployment Claims
- CAD – BOC Gov Macklem Speaks
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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