Open Account Trading Carries Risk
Analysis

All eyes on the Fed!

Political risks, high inflation and an energy crisis are very real risk factors for Europe. However, if the Fed hikes and signals aggressively then the price of (the USD denominated) oil could fall further thus helping the European economies in the long run. Lower energy costs would decrease inflation (wheat prices have already collapsed). This would take some pressure off the ECB to hike the rates which would be bearish for EURUSD while this in the long run, would reduce the fragmentation and political risks in the EU. This scenario adds another layer to today’s Fed rate decision. Is the Fed waging an economic war against Russia by driving the dollar higher and thus limiting the upside potential for the price of oil? Bond traders started to take profits yesterday pushing yields higher. This supported the dollar and weighed on oil and other risky assets.  Be ready to trade today’s main risk events (the Fed interest rate decision and the press conference) and make sure you have enough margin to trade. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

In today’s report, I provide you with trade ideas, analysis and key technical levels on:

  • EURUSD
  • USOIL
  • USDCAD
  • XAUUSD
EURUSD 8h chart 07 27

EURUSD broke the 1.0155 support and is currently trying to climb above it again. If the green team manages to create a rally above the level, we might see the market moving to the 1.0230 – 1.0250 range. A break below yesterday’s low would probably take the market to 1.0080 or so.  The nearest key S&R levels are 1.0119, 1.0155, 1.0257 and 1.0277. 

You might remember how I pointed out (here) that Italian political risks and the risk of a significant energy crisis are likely to keep the fundamental risk assessments by institutional investors negative for the Euro-area. It was my view then that inability to take out the 1.0270 resistance indicated investors are focusing more on these risks than on the larger-than-expected rate hike or the future rate hike path. This is why I concluded that the risk of EURUSD breaking  below 1.0155 had increased. This is what happened and the market traded down to 1.0119 (one of the levels I highlighted five days ago. 

Again, the Fed is a big factor in what will happen with EURUSD. There’s speculation that the Fed might not be so aggressive as the US economy is slowing down. This could lead to a situation where traders see the future rate hikes priced in already and the trend would turn from dollar bullish to dollar bearish. But even if the Fed decided to hike less than expected the EUR, due to political risks (Italy), looming recession and the energy crisis isn’t likely to be the strongest currency against the dollar. 

However, if the Fed hikes and signals aggressively then the price of (the USD denominated) oil could fall further thus helping the European economies in the long run. Lower energy costs would decrease inflation (wheat prices have already collapsed). This would take some pressure off the ECB to hike the rates which would be bearish for EURUSD while this, in the long run, would reduce the fragmentation and political risks in the EU. 

USOIL 2h chart 07 27

USOIL dropped down to the 92.41 key support level and started to move sideways between 94.11 and 95.15. The market will break out of this range so it makes sense to pay attention to the key level outside the range.  The nearest key S&R levels are 92.41, 95.15, 96.40 (bear channel high) and  97.09. 

USOIL rally was thwarted yesterday at the bear channel high. The market traded lower thus degrading some of the technical bullishness but not turning the market outright bearish either. One thing is clear though the oil bulls aren’t as strong (relative to the bears) as they were in April when USOIL was trading around the same levels the last time. This suggests the market could have more consolidation ahead before the next directional move takes place. Fundamentally, the risk of higher oil prices hasn’t gone away but at the same time, we need to acknowledge that the recession in Europe and the economy cooling in the US will impact the future demand for oil. Now our job as traders is to monitor price action to see what set of facts and/or future scenarios the institutional traders are focusing on. 

USDCAD 8h chart 07 27

USDCAD is ranging sideways near to a key weekly support level at 1.2819. The nearest key S&R levels are 1.2819, 1.2937, 1.2989 and 1.3135. 

USDCAD attracted buyers at the 1.2819 level yesterday after the USOIL rally failed. This favours my alternative scenario for the currency pair. I said yesterday that if there’s no decisive break below the range low and the market continues to trade in the range (1.2819 – 1.2937). This currency pair (for obvious reasons) has a high negative correlation with USOIL and therefore the future moves in the oil market will impact how the USDCAD trades. Today, however, we have the Fed rate decision that’s an equally important factor and likely to move the other side of the equation (the dollar). Today we’ll see if the surprisingly low services PMI (from Friday last week) will impact Fed’s rate decision. A much lower than expected rate hike would be likely to push the USD lower and support the price of oil. This would again make my short scenario from yesterday relevant: If the 1.2819 level is broken decisively I look for shorting signals with a T1 at 1.2760 and my T2 at 1.2720. As you might remember my alternative scenario was: There’s no decisive break below the range low and the market continues to trade in the range (1.2819 – 1.2937. 

XAUUSD 8h chart 07 27

XAUUSD keeps drifting lower as rally advances are faded by traders. The market is medium-term bullish but the risk for another leg down (before the bulls can take control of this) is increasing. The Fed rate decision is going to be an important factor. The nearest key S&R levels are 1680, 1712.80, 1736.17, 1728.12, 1739.19 and 1745.33. 

Traders in the T-Bond market started taking profits yesterday as the market (after a sizeable rally) reached a key resistance level. This pushed the yields higher and weighed on gold. The market created yet another lower swing high and formed a triangle. If this continues the market is likely to break the 1712.80 support level. With yields indicating strength this wouldn’t be a surprise I think. But, if the level holds then we should see the market breaking out of the triangle formation. A decisive break above the descending right-hand side of the triangle could lead to a sizeable rally but this really depends on what the Fed does today. 

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 ReserveFed hiked by 0.75% in June. After the record CPI numbers for June traders price in a 77.4% probability for a 1% hike in July. This would take the target rate to the 2.5% – 2.75% range. Based on the Fed Funds Futures rate the probability for the 3.25% – 3.50% range in September is currently 75.8%. Currently, traders believe the target rate will be at 4% by the end of the year. 
YieldsIt seems that the US 10-year treasury yield has found a temporary floor at 2.726%. The five-week range high is at 3.498%. 
EmploymentThe number of jobs in the US economy increased by 372K in June beating the market forecasts of 268K. The number was only slightly below the revised (down) 384K in May. The increase was in line with the average monthly gain of 383K over the prior 3 months indicating that the labour market stays strong. 
InflationThe annualised inflation rate for June accelerated to 9.1%. This was the highest reading the Q4 1981 (up 0.5% from May). The cost of energy rose 41.6%. Fuel prices increased 59.9%. These were the biggest increases in these items since Q2 1980. Food costs surged 10.4%, the most since Q1 1981.

 The Next Main Risk Events

  • USD Core Durable Goods Orders m/m
  • USD Durable Goods Orders m/m
  • USD Pending Home Sales m/m
  • USD FOMC Statement
  • USD Federal Funds Rate
  • USD FOMC Press Conference

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta

Chief Market Analyst

TIOmarkets.com

DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated.

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