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Fed hiked the target range again by 75bps (to 2.25%-2.5%). The 0.75 rate hike was in line with expectations and therefore already priced in and lead to a risk on rally. This was the fourth consecutive rate hike but the dollar bids softened further as the rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent. In practice, this means that there’s not going to be clear forward guidance but the Fed will take the rate decisions on a meeting-by-meeting basis. Thus future rate announcements and Fed press conferences are likely to be associated with higher volatility in the markets. Today’s key risk event is the US GDP release. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

Hope you read my report from yesterday! The dollar and EURUSD moved just like I suggested in the scenario I highlighted. Here’s what I said: “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”. This is pretty much what happened so let’s take a look at some of the key markets and see how they are now trading.

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

  • EURUSD
  • GBPUSD
  • USDJPY
  • XAUUSD
EURUSD 2h chart 07 28

EURUSD – rallied above the 1.0155 level and almost hit my target range of 1.0230 – 1.0250. The market isn’t far from the range high though, so if the 1.0180 holds it doesn’t take much of a move to reach the target range. There’s a bear channel high at 1.0230 and some resistance levels above it. The nearest key S&R levels are 1.0096, 1.0180, 1.0257 and 1.0277. 

The 0.75 rate hike was in line with expectations and therefore already priced in. EURUSD moved higher but was far from being the strongest currency against the dollar. For the reasons for this relative weakness check my analysis report from yesterday (here). Now the pair is in a downward pointing trend channel but the dollar in general is weakening which could courage the bulls to push EURUSD beyond the channel top. However, the EUR isn’t very strong compared to e.g. JPY, GBP and AUD are rallying much stronger today. Therefore, if you are looking for long opportunities over the coming days you might want to pay more attention to JPY, Cable and AUD. 

GBPUSD 2h chart 07 28

GBPUSD was among the strongest currencies after the priced-in rate hike yesterday. Now the market is trading at a historical resistance level (1.2172). The trend has turned from bearish to bullish so even if there are short-term corrections the market in the medium-term has more upside than downside potential. The nearest key S&R levels are 1.2020, 1.2069, 1.2142 and 1.2186.

Cable is trading at the upper end of the bull channel after the Fed signalled that it’s not going to be more aggressive than what the markets had already priced in. The probabilities for another 0.75% hike in September have now dropped from 52% to 34% which explains why the institutional money is flowing out of the USD. If buying comes in at key support levels the probabilities of Cable rallying further increase. Therefore, let’s keep the key S&R levels in mind. 

USDJPY 2h chart 07 28

USDJPY – remains bearish below 137.42 but is approaching a key support level at 134.70. The nearest key S&R levels are 134.70, 135.56 and 136.27. 

I said (here) that USDJPY was trending lower and was bearish below 137.95. The market rallied to 137.42 and dropped like a stone after the rate hike and press conference. Now we are getting close to a key support level which could take some of the velocity away from the market. 

XAUUSD 2h chart 07 28

XAUUSD – The 1712.80 wasn’t violated and gold rallied to a daily resistance at 1739.19. The market remains medium-term bullish as I have maintained over the last few days. This, however, doesn’t mean the market cannot swing about and retrace to key supports every now and then. The nearest key S&R levels are at 1712.80, 1725.14, 1733.08 and 1739.19. 

I highlighted the importance of the 1712.80 level yesterday. It was an important threshold level and you might remember me saying that: “If the level holds then we should see the market breaking out of the triangle formation”. This is what happened and gold rallied over 1.6% after the Fed failed to surprise the markets. 

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 the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
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.

 

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The Next Main Risk Events

  • USD Advance GDP q/q
  • USD Advance GDP Price Index q/q
  • USD Unemployment Claims
  • USD Treasury Sec Yellen Speaks
  • NZD RBNZ Statement of Intent
  • EUR CPI Flash Estimate y/y
  • EUR Core CPI Flash Estimate y/y
  • CAD GDP m/m
  • USD Core PCE Price Index m/m
  • USD Revised UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta

Chief Market Analyst

TIOmarkets.com

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