Out of our four forex strategy discussions this week, three were arguably very effective with proper risk management as our strategists did a great job of navigating around a busy calendar of top tier events. Jump in to see how it all went down!
Forex Setup of the Week: USD/JPY’s Consolidation Ahead Of The FOMC Decision
On Monday, we spotted a sweet consolidation pattern on USD/JPY, the perfect setup for those expecting a strong directional move in the U.S. around the highly anticipated FOMC monetary policy statement. Expectations were that the Fed would pause its rate hiking cycle due to stabilizing inflation data in the U.S.
Our outlook was that if the Fed succeeded in communicating its hawkish bias despite a “skip” in interest rate hike this month, then USD/JPY could gain more pips.
Well, it looks like that’s what we got as the Fed did hold off on another rate hike this month, but they also signaled a high probability of more hikes ahead. It’s also notable that no member saw the possibility of a rate cut in 2023.
USD/JPY broke above the triangle pattern noted in the original discussion, jumping nearly 200 pips before sellers reversed the market, likely from profit takers. An argument can also be made that anti-dollar players came to play, focusing on weak U.S. economic signals, including falling U.S. business survey data, falling inflation updates, and rising unemployment claims to anchor the idea that the Fed may not need to hike again in July.
By Friday, USD/JPY bulls took back control as the market retested the rising 100 SMA, likely a reaction to the BOJ announcing no change to their monetary policy, holding their target interest rates at -0.1%.
For those who rode the volatility on this one and executed good risk management practices, you likely did well with this strategy discussion this week.
USD/CHF: Tuesday – June 13, 2023
On Tuesday, we decided to throw another Dollar focused setup, this time on USD/CHF. We also made the catalyst focus on the fast approaching U.S. CPI update, which we thought could influence speculation/sentiment on the FOMC statement.
Expectations as discussed in our Event Guide were that the CPI number would come in below the April rates of change, and in that scenario, the U.S. dollar could fall against currencies with relatively hawkish central banks. But we didn’t completely count out the FOMC statement as a potential short-term bullish catalyst for the pair.
Well, those expectations seemed to have played out as the U.S. CPI headline number actually came in below expectations (but didn’t immediately send the pair lower), and the FOMC did signal further hikes ahead to send the pair higher during the Wednesday session.
Traders did get bearish on the pair during the Thursday session, possibly on the bear dollar argument discussed in the USD/JPY recap above, where the recent U.S. data points to a possible scenario where the Fed may have reached peak hiking cycle.
The Swiss franc also likely rode a spike in euro strength, which came after very hawkish comments from the European Central Bank (they signaled a hike in July was “very likely”).
For those who were able to hold on to a wild ride through all of the major catalysts, this was a very successful setup if it was risk managed well.
EUR/USD: Wednesday – June 14, 2023
On Wednesday, EUR/USD had just hit a strong area of interest on the chart, a rising ‘lows’ trendline that could be of great interest to both the bulls and the bears. Very interesting indeed as it was likely a great jump off point for either camp depending on the upcoming monetary policy statements from both the FOMC and ECB.
As we’ve discussed above, the FOMC gave us the “hawkish pause” scenario that was highly anticipated, while the European Central Bank lifted interest rates by 25 bps as expected.
Our main thoughts ahead of the events were that if the Fed did pause its rate hikes and if the ECB raised its interest rates like markets are expected, then EUR/USD could regain its intraweek highs.
Well, that’s pretty much how it played out, and with extra help from ECB rhetoric that a July hike is “very likely.” EUR/USD shot up like a rocket over 100 pips on the ECB event, testing the 1.0950 minor psychological area before losing momentum.
This was another setup that aligned with our strategy discussion, and with proper risk management, it was a likely profitable setup.
EUR/NZD: Thursday – June 15, 2023
For our last strategy discussion of the week, we focused on the ECB monetary policy statement as it was likely to cause a stir in the euro with expectations of a rate hike ahead.
This time though, we thought the event could send the euro higher during the release, which would actually give bearish traders on EUR/NZD a chance to play the longer-term trend lower on the 1-hour time frame.
We were leaning in that camp based not only on our euro outlook discussed in our ECB Event Guide, but also on the possibility that broad market sentiment may shift positive on the idea of the Fed nearing the end of the rate cycle.
As discussed in our other recaps, the euro did pop higher after the ECB hiked and signaled more hikes to come, pushing EUR/NZD to the top of the falling channel and met resistance once again.
After consolidation through the Thursday U.S. session and Friday Asia session, we saw one more pop higher in the pair, only to meet resistance again. It’s likely news of the BOJ holding interest rates at ultra-low levels may have brought in some risk-on traders / comdoll bulls.
It doesn’t look like we’ll get a significant move to give this strategy a clear resolution of whether it was effective or not. But for those active traders who risk managed a short entry around the 1.7600 psychological level (around the top of the falling channel), it’s likely you were able to grab a few pips ahead of the weekend. For those who were a little less patient with your entry, it’s likely you gave up a few pips if you decided to dump before the week’s close.
