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Trading Profits And A Hawkish Takeaway

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It came as expected, but with a hawkish takeaway. The Federal Reserve paused rate hikes in June after 15 months of interest rate increases but there is less conviction for markets now that yesterday’s decision will mark the end of its tightening cycle. The Federal Open Market Committee stated that this month’s pause aims to allow the officials to assess more incoming data and Powell added that nearly all FOMC officials expect ‘some’ further rate hikes. Additionally, the dot plot peak rate for 2023 revised to 5.6 percent form previous 5.1 percent, which suggests another 50bp tightening by the end of this year.

The U.S. dollar gained following the more hawkish dot plot projections and thus, corrected recent gains in the EUR/USD and GBP/USD.

Our yesterday’s signal entries have proved highly profitable with two long entries in both pairs, providing only yesterday +64 pips in the EUR/USD and +80 pips in the GBP/USD.

Today, we will have the European Central Bank decision due at 12:15 UTC followed by the ECB press conference. It is expected that officials will raise rates by 25bp but may signal on a dovish guidance.

 

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Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.

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Bleak Economic Outlook

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Welcome to a new trading and central bank rate-hike week.

After an unexpectedly higher U.S. inflation reading last Friday, chances for a 75bp Federal Reserve rate hike at the upcoming FOMC meetings are rising.

The Fed is expected to raise rates by 50bp on Wednesday but the main focus will be on the quarterly summary of economic projection which includes the dot-plot rate projections. Fed policy makers may pencil in a steeper path of interest rate hikes this year in the light of recent inflation developments. While a 50bp rate hike this month is all but certain, traders speculate on an even bigger rate hike of 75bp, and if not in June, then maybe in July. Apart of the hawkish guidance, the focus is shifting to the broader impact of the central bank’s policies on the economy. Aggressive rate hikes are having little effect on rising price pressures while the economy is cooling. Economists at Bloomberg put the chances of a recession at three in four next year saying “a downturn in 2022 is unlikely, but recession in 2023 will be tough to avoid”.

Last but not least, the Bank of England is widely expected to raise its interest rate on Thursday from 1 percent to 1.25 percent. Some market participants even price in some probability of a 50bp hike but this seems to be the much more unlikely scenario. Overall, the pound is anticipated to fall even further since the U.K. economy looks set to struggle.

GBP/USD – Bearish breakout

Sterling broke below 1.24 and the yearly low at 1.2155 isn’t all that far away now. Bears will now focus on price breaks below 1.2240 and 1.22. If the yearly low is cleared, there might be nothing in the way of a fall towards 1.20. The former support at 1.24 could now serve as a resistance.

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Event-Laden Trading Week

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Welcome to the last fully-liquid and event-laden trading week of the year 2021. Before the liquidity drain towards the end of the year, this week is overloaded with major event risk such as the FOMC rate decision on Wednesday and the rate decisions of the Bank of England and European Central Bank on Thursday. Traders are thus prepared for surprise volatility this week.

Top event risk will be Wednesday’s FOMC decision and while the tone-setting Federal Reserve carries far more weight than other central banks, the Fed will avoid triggering surprise volatility. There will be no change in interest rates but catalysts for potential market moves will be the pace of tapering and the timeline for rate hikes. FOMC officials have recently signaled a hawkish shift in their policy stance amidst elevated inflation (CPI hit a nearly four-decade high last Friday), robust economic growth and strengthening labor market conditions. Market participants have thus pushed rate hike speculation up to two full Fed hikes in 2022. Even if Fed officials have turned slightly more hawkish, the Fed perhaps cannot live up to the market’s more hawkish expectations. Traders should thus be prepared for disappointment and a potential U.S. dollar retreat.

Bank of England rate hike unlikely

The risks remain tilted to the downside for the British pound while the market still sees a 42 percent chance of a 15bps rate hike Thursday. However, the BoE is not expected to raise rates this time due to the newly uncertain economic outlook. Moreover, the BoE is much more likely to raise rates in months when it also delivers forecasts and a press conference where it can explain the decision to the public. The next one of those will be in February. Nonetheless we bear in mind that policy makers have warned that the consequences might be steeper when rates are raised later. In other words, BoE policy makers may have to raise rates further than markets currently expect to moderate inflationary pressures.

GBP/USD Technical view: Chances of a reversal

Given the oversold situation of the pound in longer time frames, we may get close to peak bearishness with increasing chances of a reversal toward 1.35. As long as the cable holds above 1.3150 and 1.31, bulls may regain some control in this pair.

Euro traders are well advised to sit on the sidelines until Thursday

The European Central bank meeting on Thursday is difficult to predict as there could be an internal battle between hawks and doves. The dovish core of the council will want to avoid premature tightening while high inflation and near-term upside risks could justify the removal of the ECB’s policy support. However, as long as an interest rate hike is not in the cards, the euro may trend to the downside against other peers.

EUR/USD Technical view: Waiting for a bear flag confirmation

In longer time frames the euro formatted a potential bear flag (green trend channel lines) within the recent downtrend. Should the pair now show a weekly close below 1.1250, we could have a confirmation of the bear flag with the focus shifting to lower targets at 1.11 and 1.10. For a bullish breakout on the other side, we would need to see a significant break above 1.1450. As long as the euro remains trading between 1.1450 and 1.1250, we will maintain a wait-and-see attitude.

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Traders Brace For Heavy Docket Of Event Risks

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Last week ended with a fresh bout of risk aversion in the market, with the safe-haven U.S. dollar benefitting from fragile global risks factors and fears over Federal Reserve tightening including rising rate hike odds.

This week brings high-profile event risks such as the Federal Reserve rate decision (Wednesday), followed by the Bank of England decision (Thursday). While the BoE is expected to leave its stimulus package in place amid a slowing economy, the Fed will probably hint that it is moving towards tapering monthly asset purchases and may make a formal announcement in November. Most economists expect the Fed to start tapering in December. A first rate hike is expected in the second half of 2023, followed by three more in 2024 according to a survey. The much-watched “dot plot” of rate forecasts will include 2024 for the first time and will thus be the big story on Wednesday.

Elevated Fed rate hike odds have produced a more favorable trading environment for the greenback and if the Fed dots surprise to the upside, dollar bulls will have room to price in a more hawkish Fed.

EUR/USD

There is not much positive to report amid the euro’s clear bear trend. From a fundamental perspective, the common currency faces further downside risks in the coming days such as monetary policy decisions of its counterparts as well as Sunday’s German Federal Election. Technically, the risk is tilted to the downside but there is a crucial support zone ranging from 1.17 to 1.1660 which could halt the euro’s fall – at least in the short-term. Additionally, the pair approaches oversold territory, making small rebounds more likely. On the upside, we see a short-term resistance at 1.18. However, if 1.1650 breaks to the downside, lower supports come in at 1.16 and 1.1530.

DAX

The sell-off accelerates. Last Thursday we prepared traders for upcoming breakouts and we got what we have been looking for – much to the pleasure of the bears. This morning we see the index extending its slide towards 15300, while we penciled in a next potential support at around 15270. However, as long as 15000 remains unbroken, we could see some reversal towards 15700 but we bear in mind that political risk could weigh on the index.

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No Surprises Expected From The Fed

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It is widely expected that the Federal Reserve will maintain a steady policy course when it concludes its two-day FOMC meeting today. Fed officials are not expected to signal a reduction in support for the U.S. economy but will debate how to scale back massive bond purchases when the time comes.

Officials have pledged to maintain bond buying until the economy shows “substantial further progress” on inflation and employment as it recovers from the pandemic.

Meanwhile, pressure on Chair Jerome Powell to start the taper sooner rather than later has probably been eased by the recent slide in bond yields, as investors worry the spreading delta coronavirus variant could sap the recovery.

While we do not expect any major surprises from today’s policy decision, we prepare for potential price breakouts in both directions.

GBP/USD

The cable surged towards 1.39 and traders wonder whether this could be the limit. Despite the fact that the pair entered overbought territory in short-term time frames, it would need an unambiguously hawkish Fed statement to derail the recent bullish movement. In other words, as long as the pair holds steady above 1.37, chances remain in favor of a breakout above 1.39 and a run for 1.40.

EUR/USD

As expected, the euro strengthened towards 1.1850 and we anticipate bullish momentum to continue towards 1.1970-1.20, unless there is a hawkish surprise from the Fed which is less likely today. On the downside, the 1.1730-1.17 support remains intact.

We wish you good trades!

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FOMC July Meeting A Non-Event For Traders?

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We welcome you to this new trading week which will be the last one before our summer trading break (2/8/ -20/8/21).

This week’s key event risk will be Wednesday’s Federal Reserve policy decision but traders should not expect too much from the July FOMC meeting as it falls between the June FOMC which brings new economic projections (SEP) and the August meeting in Jackson Hole. The July meeting is therefore typically “overlooked” with investors shifting their focus to the central bank’s August 26-28 annual policy retreat in Jackson Hole, where the Fed is likely to hint at tapering.

There are no published FOMC forecasts this meeting and with Fed Chair Jerome Powell recently indicating that slowing stimulus is too early, the Fed may discuss its tapering plans but is not expected to make a formal announcement at this time. For traders, the FOMC meeting could thus prove to be a non-event in terms of big market moves.

Fresh signals from the Fed (and thus bigger market moves) are expected either at the Aug. 26-28 policy retreat in Jackson Hole or at the Sept. 21-22 FOMC meeting.

GBP/USD: More upside potential might be in store for this pair but we expect the 1.3830-50 region to serve as a short-term resistance. A break above 1.39, however, could open the door for a run towards 1.40. Below 1.3650, the focus shifts towards 1.35.

EUR/USD: As long as price action remains muted in this pair, we continue to watch out for a price range between 1.1850 and 1.17.

DAX: We keep an eye on the price range between 15900 and 15000. A sustained break above 15900 could open the door for a run for 16250. On the downside, a break below 15000 could see a next lower target at 14800.

Summer is in the markets and given a lower-liquidity backdrop across many markets during the summer months the potential for range-bound conditions is high. We therefore recommend traders staying on the sidelines during these low-liquidity periods, taking a break from the markets and adjusting risk exposure. The next major risk event will be later in the summer with the Jackson Hole Economic Symposium August 26-28.

We will take our annual summer trading break from August 2 to August 20 but we adjusted risk exposure even in the month of July.

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U.S. Dollar Remains Unmoved Ahead of The FOMC Meeting

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The U.S. dollar ended the trading day virtually unchanged against the British pound after the support around 1.4070 has proved to hold – at least for now.

Trading was also relatively quiet in the EUR/USD with the pair fluctuating within a narrow 40-pips-range between 1.2130 and 1.2095. The performance of this pair will now mainly hinge on the demand for U.S. dollars.

DAX: The index tested the 15800-mark while our long entry proved profitable. We now see a next hurdle at 15850 which needs to be broken before the focus shifts towards higher targets. On the downside, we see a current support at around 15500.

Today at 12:30 UTC we will keep an eye on the U.S. Retail Sales report which could impact the greenback ahead of tomorrow’s FOMC decision.

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We wish you good trades!

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Fasten Your Seat-belts For The Last Big Week Of The Year

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This content is for EUR/USD, GBP/USD, DAX and EUR/USD, GBP/USD, DAX members only.
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