Traders take it as a given that the Fed hikes by 50 bp. This is clear from the Fed funds futures pricing in a probability of 99.1% for a half percentage point rate hike. Therefore, what really matters today is the press conference, i.e. what Fed Chair Powell will say about the future rate hike path. Is he going to be as hawkish as before (this too could be priced in) or is he going to signal that the Fed will take an even tougher approach and maybe reduce its $8.9 trillion balance sheet significantly? 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 trade ideas and commentary on:
- EURCAD – Bearish, pressured by European risks and rising oil prices
- USDCAD – Bearish, pressured by strength in oil
- GBPUSD – Ranging after a long downtrend, ready to reverse?
- DJ – Slightly bullish as VIX drops lower by 9%
Fed’s greater than expected hawkishness would be likely to create downward pressure in equities and other dollar-dominated commodities markets. On the other hand, the Fed could turn out to stay within the scope of its recent guidance which could create another short-term rally in equities. VIX dropped approximately 9% in yesterday’s trading revealing that investors are dismantling their protective option hedges. Even though this didn’t lead to equities rallying higher yesterday (markets were in a wait and see mode already) it indicates that traders are betting the Fed is more likely to stay on the path they have indicated.
EURCAD has been trending lower for some time. The combination of the recent strength in the price of oil and the risks related to the war in Europe has pressured the pair. EURCAD stays bearish until it has reversed the downtrend. For this to happen I’d like to see the market rallying above the 1.3597 resistance. Then I’d place this market on my Potential Reversals watchlist but as long as the market keeps on failing at resistance levels and breaking supports I’ll focus on the short side. Therefore I’m looking for short trades below the 1.3597 resistance level with the first target at 1.3360 and the target two at 1.34010. Alternative scenario: The EURCAD penetrates the 1.3597 level decisively and rallies to the 1.3740 – 1.3760 range.
USDCAD has been zig-zagging sideways since my report yesterday and is now trading below a key price level (at 1.2838) I referred to yesterday. The pair has now reached my first (scalper) target at 1.2810. I was my view (here: bit.ly/USDCAD_Analysis) that the pair was reacting to strength in the price of oil and thus I expected to see weakness in this market yesterday. After a failed rally the pair closed below the 1.2838 level in the US session and has since then been unable to close above the level in the hourly chart. This is a day trade idea with targets within a reasonable distance as per daily volatility in this pair. The first target is a high probability scalping target while the second target is for an intraday swing trade. My T1 is at 1.2810 and my T2 is at 1.2765. My alternative scenario for this market was: USDCAD doesn’t break the 1.2838 support and rallies back to the 1.2900 – 1.2910 range.
GBPUSD is trading in a sideways range as traders wait to see what the Fed’s plans are after the initial 50 basis point hike today. This hike is very likely cooked into the prices already but it’s the guidance that everyone’s interested in. As we don’t know what the guidance will be and what the future price action related to it is going to be like we have to live with uncertainty and make scenario analyses. As price action traders we really don’t need to know what the fundamentals are going to be like. Instead, we can just concentrate on price action and if we see new price-sensitive information coming into the market we can see if the information is confirmed by the price action. This gives us tremendous flexibility relative to those that make predictions and then try to force the market into the mould they just created.
GBPUSD is now trading in a sideways range (1.2411 – 1.2614) after a long downtrend. We don’t know whether the market will move deeper or whether it will turn higher but one thing is certain: The GBPUSD pair has to break out of the range. If it breaks decisively to the upside the Fed statements must have been weighing on the dollar and the market and the market is likely to move back to 1.2739 or so. That’s where I have my upside target. As the market is so deeply oversold I have my downside target relatively close at 1.2354.
DJ had false breakouts from the range I talked about yesterday and then settled into the range again. US equity traders went into a wait and see mode earlier than I expected but I’m getting a feeling that the market is still more biased to the upside. This is, however, only my gut talking so you should only follow what the market does and trade accordingly. The nearest key price levels at the moment are 32450, 32894, 33342 and 33721. The big picture in this market supports a bullish view (VIX indicates downside hedges are exited and the market is deeply oversold). Therefore, unless Fed comes out even more hawkish than it has been in its recent guidance (and if price action supports my view) I will look for buy signals. If rallies fail then I will either stay in cash or look to trade the short side. Either way, there should be enough volatility for good-sized day trades in the DJ 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 Reserve||Markets take it as a certainty that the Fed hikes 0.5% this week and believe the June rate hike could be as high as 0.75%. The Fed is prepared to taper by $60B of treasuries and $35B of mortgage back securities per month.|
|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 risen to 2.187% as investors sell the bonds and adjust to the expected rate hikes.|
|Employment||The March non-farm payrolls increased by 431K while the analyst consensus had predicted 492K new jobs. The unemployment rate dropped to 3.6% and average hourly earnings were in line with expectations (0.4% vs. 0.4% expected).|
|Inflation||The annual headline inflation reading for March came in at 7.5% (7% prior). This was the highest CPI print in 40 years. The core CPI (all items less food and energy) was confirmed at 6.0% (5.5% previous).|
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The Next Main Risk Events
- USD – ADP Non-Farm Employment Change
- USD – ISM Services PMI
- USD – FOMC Statement
- USD – Federal Funds Rate
- USD – FOMC Press Conference
- USOIL – OPEC-JMMC Meetings
- GBP – BOE Monetary Policy Report
- GBP – MPC Official Bank Rate Votes
- GBP – Monetary Policy Summary
- GBP – Official Bank Rate
- USD – Unemployment Claims
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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