Markets have been on a roller coaster ride. Here are our latest forex trading ideas.
Markets are coming off weeks of high risk-on mood, owing to cooling inflationary pressures that cemented investors' expectations of a Federal Reserve's last rate hike in May.
The S&P 500 Index posted five consecutive weeks of gains, a streak not seen since October 2021, while the U.S. Dollar Index (DXY) posted five consecutive weeks of losses, the first time this has occurred since November 2020.
These moves were bolstered last week by lower-than-expected US consumer inflation (CPI) in March (5% year on year vs 5.2% expected), though core annual inflation rose from the previous month (5.6% vs 5.5% in February), matching expectations; higher-than-expected weekly jobless claims (239k vs 232k predicted); declining US producer inflation (PPI) (-0.5% in March vs 0% expected) and dropping retail sales (-1% in March vs -0.4% expected).
However, the release of the University of Michigan consumer confidence survey on Friday, April 14, indicated not only a slight improvement in overall sentiment, but also a significant increase in expectations for future inflation, with American consumers now expecting inflation of 4.6% at one year, up from 3.6% the previous month.
This was enough to awaken dollar bulls from their long hibernation and flash a red light at the Federal Reserve. The key uncertainty is now not so much the May meeting, where markets are already pricing in a 21 basis point rate rise, but what will happen afterwards.
Investors anticipate a 50 basis point cuts in the second half of 2023, with the fed funds rate expected to be at 4.30% at the end of January 2024.
These dovish expectations are likely to be disappointed if the US economy continues to hold up nicely and core inflation remains high, forcing the Fed to maintain higher-for-longer interest rates.
This week, we’ll get minutes from the ECB and the RBA, hear from several Fed and ECB speakers, and the Fed releases the Beige Book. On the data front, we have CPI prints for the UK, Japan, Canada and New Zealand.
Here are the trading ideas for the week, looking at currency pairs: EUR/USD, GBP/USD, and USD/CHF.
EUR/USD Trading Strategy: Bearish RSI Divergence In Place
Short EUR/USD: Target Price 1.0713; Stop Loss 1.1095. Risk-reward ratio of 2.18.
The euro has advanced for seven weeks in a row for the first time since June 2020, and has gained 5.5% over the past month, rising to 12-month highs over 1.10 last week.
Markets continue to expect a strong rate hike path by the ECB, with 80 basis points fully priced by October 2023, as the underlying core inflation hit a record high of 5.7% in March, and continues to remain well-above the central bank’s 2% target.
In terms of key event this week we have ECB President Lagarde Speech on Monday, ZEW economic sentiment prints for April on Tuesday, ECB minutes on Thursday and flash S&P global PMIs for April on Friday.
After spiking as high as 1.1076 last week, EUR/USD retraced below 1.10 last Friday, and continued to trade weaker on Monday morning in Europe.
A daily RSI bearish divergence has formed in the pair, as prices pushed above February’s highs, but the 14-day RSI failed to kick higher than prior highs, suggesting potential exhaustion of the short-term bullish trend.
The downward movement could be further amplified if EUR/USD breaks below 1.09, which represents the 50% Fibonacci retracement level of the 2021-2022 low-to-high range. If this condition is triggered EUR/USD could potentially seek support at 1.0745 (50-day moving average) or slightly lower around March 24th lows at 1.0713. Stop could be set just slightly above last week’s high at around 1.1095, for a risk-reward-ratio of 2.18.
GBP/USD Trading Strategy: Breakdown of the March’s Bullish Channel
Short GBP/USD: Target Price 1.2178; Stop Loss 1.2483; Risk-reward ratio 2.02
The UK inflation rate for March, which is due on Wednesday, will be crucial for the pound, with consensus forecasting a single-digit rate (9.8% year on year), the lowest since August 2022. If UK inflation is lower than predicted, the Bank of England's 50-basis-point implied rate rises through September 2023 will almost certainly be questioned by the market, producing some weakness for the sterling.
Technically, we observed the breakdown of the ascending channel formed in March, which had propelled GBP/USD to 10-month highs around 1.2550.
The pair is presently testing a critical Fibonacci retracement level of the 2023 high-to-low range of 23.6%. The daily RSI is also trending southward.
We might see some short-term weakness to remain this week as falling energy costs in Europe may have likely put downward pressure on the UK CPI print in March.
Bears are targeting 1.2178, a significant multi-support level around the 50dma and the 50% Fibo retracement of the 2023 range.
This strategy would be proven wrong if the GBP/USD returned to the ascending channel. Stop losses might be set at 1.2483 (lows on April 13th).
USD/CHF Trading Strategy: Time To Exercise Caution Before the Fed Meeting
USD/CHF Long (2 weeks horizon): Target Price 0.92, Stop Loss 0.885; Risk-Reward Ratio 2.52
USD/CHF continues to move in lockstep (but inversely) with gold – the 21-day rolling correlation is -0.82 – and the pair has recently dropped to its lowest levels since February 2021, thanks to a weaker USD and a rebound in gold.
Bears have total control of the trend, despite some little dip-buying activity last week due to oversold levels on the 14-day RSI.
However, both gold and the franc have likely overextended relative to what current Treasury yields and US real rates would indicate. That means bears should exert some caution here, as a reversal of the bearish trend may occur prior to the May 3rd Fed meeting.
The pair is expected to trend lower in the medium term as the Fed rate cycle concludes, although any repricing higher in US rates and yields may create some bullish moves in the coming weeks.
The highs for April are at 0.92, which coincides with the 50-day moving average, and such a level might be an interesting target to look at in order to position defensively against any Fed hawkish remarks ahead of the May meeting.
Other Interesting Forex-Macro Correlation To Keep An Eye On:
USD/JPY Trading “Cheap” vs. US-Japan 10-year yields differential
EUR/CAD Trading “Rich” versus WTI prices