Fed 50 bp hike fully priced in and traders put a 92% probability for the Fed funds target rate to be at 150 – 175 bp range after the June meeting. And, the probability for a rate hike into the 200 – 225 bp range in the July meeting is at the time of writing also very high: 87%. No wonder the benchmark T-Bond yields peaked above the 3% mark in yesterday’s trading. Bond investors keep on shedding their inventory in the anticipation of aggressive Fed rate hikes. This means there will come a point at which most of the traders are on one side of the market. When this happens we could get a volatile snap back in the markets. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
This volatile reversal could come about as buy the rumours and sell the news kind of trade (or vice versa, depending on the markets you trade) or it could happen with the Fed starting to react to negative economic growth and employment data and to plummeting stock prices should there be a significant downside move in the stock indices. We are not there yet and will only know when we see the market moves evidencing the change in the direction of the money flows.
Remember, that a market can only move up if there’s a constant flow of new money into the market that leads to aggressive buying (market orders taking the offers). The same applies to falling markets but reversed. Only if there’s aggressive selling (market orders hitting the bids) can markets move further down. This requires active effort from the sellers’ side as they get rid of their inventory or short the market. Once most of the traders are on one side of the market and they have spent they are fully positioned the aggressiveness slowly disappears opening opportunities in the opposite direction – and the market reverses starting the same process of either taking the offers or hitting the bids in the other direction. The only way of knowing when this happens is to analyse price action, trends and counter-trends.
DJ is trading below a key resistance level (at 33231). A strong break above this level could propel the DJ is trading between a key resistance level at 33231 and minor support at 33009. A strong break above the resistance level could provide intraday trading opportunities today. On a decisive break of the 33231 resistance level, I’m looking for long trade signals. My first target is at 33455 and my second target is at 33673. Alternatively, if the market fails to rally above the 33231 level and decisively breaks the 33009 support level the DJ could move to 32793 or so.
USDCAD has been trading lower in the Asian session today. The pair is reacting to strength in the price of oil and could be heading lower in today’s trading. If the pair breaks the 1.2838 support I’m looking for short trades below the level. My T1 is at 1.2810 and my T2 is at 1.2765. Alternative scenario: The market doesn’t break the 1.2838 support and rallies back to the 1.2900 – 1.2910 range.
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%.|
|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).|
The Next Main Risk Events
- USD – JOLTS Job Openings
- NZD – RBNZ Financial Stability Report
- NZD – Employment Change q/q
- NZD – Unemployment Rate
- EUR – Spanish Unemployment Change
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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.