Markets have been on a roller coaster ride. Here are our latest forex trading ideas.
The dollar remains under selling pressure and has lost territory against every G-10 currency over the past week, despite the Federal Reserve hiking rates to 5-5.25%, the highest since September 2007, and economic data continuing to favorably surprise expectations of a market heavily relying on rate cuts as early as this year and an impending US recession.
The US economy added 253,000 jobs in April, up from a revised 165,000 in March and far above predictions of 180,000, while the unemployment rate fell to a multi-decade low of 3.5%. The service sector of the US economy continued to expand, as indicated by the 51.2 print in the US ISM Services PMI in April.
Economic data in Europe's largest economy began to trend lower, with German retail sales falling 2.4% month on month in March (vs. +0.4% expected) and factory orders plummeting 10.7% (vs. -2.2% expected). Excluding the pandemic, this was the largest slump in Germany’s factory orders since August 1976, even worse than in 2008-2009. The ECB also raised interest rates by 0.25% last week, and Lagarde indicated that there was still more ground to cover.
This week's key macro events include the US CPI report (Wednesday), Fed/ECB speakers (Monday through Friday), the Bank of England interest rate decision (Thursday), UK Q1 GDP data, and US Michigan Consumer Sentiment for May (Friday).
Any figure that is higher than expected would likely be bullish for the dollar, given the Fed has suggested that future decisions will be data-dependent. The market presently assigns a 90% chance of a Fed hold in June.
The Bank of England is anticipated to raise interest rates by 0.25% to 4.5% in a 7-2 decision. The focus today will be on evaluating if the Bank is planning to increase more in June and July.
Open trades from past weeks:
- Short EUR/USD: Opened at 1.0982; Target Price 1.07; Stop Loss 1.11; P&L current -0.48%
- Long USD/JPY: Opened at 134.35; Target Price 138; Stop Loss 132.5; P&L current +0.5%
- Long CAD/JPY: Opened at 100.89; Target Price 104.3; Stop Loss 98.05; Risk-reward-ratio of 1.4; P&L current +0.21%.
Closed trades from last week:
- Long USD/CHF: Opened at 0.8932; Target Price 0.92, Stop Loss Triggered at 0.8850; Loss -0.92%
- Short NZD/USD: Opened at 0.6176; Target 0.60; Stop loss Triggered at 0.625; Loss -2.6%
GBP/USD Trading Strategy: Rally Overdone?
Short GBP/USD: Target 1.227; Stop Loss 1.30; Risk-reward-ratio of 1.1
In the past three months, the British pound has outperformed all other G-10 currencies and rose by about 5% versus the US dollar.
Despite the fact that the Federal Reserve has raised rates more than the Bank of England during the last year, the GBP/USD exchange rate has reached its highest level against the dollar since May 2022.
Yield differentials have shifted in favor of the pound, with the 2-year Treasury-gilt gap falling as low as -17 basis points, the lowest since October 2020, and the 10-year spread currently providing gilts a 30bps positive advantage against Treasury.
We think there is a lot of negativity priced in into US economic performance, and too much hawkishness in the BoE cycle.
A higher-than-expected US CPI this week could be a red light for GBP/USD bulls, but another risk is of course related to the BoE meeting.
From a technical perspective, we have hit 1.2650 levels, which were the highest since end-May 2022, the next key resistance is given by 1.30 (psychological and a key support in April 2022), which is distant 3% from current levels.
To hit those levels, it will likely be needed a way lower than expected US CPI and a strongly hawkish BoE.
We like playing a tactical retracement, on RSI and MACD bearish divergences, with the April ’23 support at 1.227, slightly below the 50-day moving average, offering an interesting short-term target to attack. Stop could be set at 1.30 which if hit could trigger further bullish confidence.
EUR/JPY Trading Strategy: More Ground To Cover?
Long EUR/JPY: Target 160; Stop Loss 142; Risk-reward-ratio of 1.66
The ECB used more hawkish rhetoric than expected last week, opting to cease net asset purchases in July and stating that there is still ground to cover for hiking rates since inflation remains too high.
The greatest proxy to speculate on the final leg of ECB rises is the EUR/JPY pair, which, although increasing 4.5% in 2023 and trading at its highest level since October 2008, may still have some room to the upside.
Positive yield differentials between Germany and Japan continue to justify fixed-income long bets on euro-yen carry trade.
In a week with numerous ECB speakers hitting the wires, including Chief Economist Philip Lane on Monday and hawk Isabel Schnabel on Tuesday, they will almost certainly echo President Lagarde's message that the ECB has more "ground to cover" if the baseline holds.
We think EUR/JPY might reach 160 in the medium term, probably this summer, representing an 8% increase from current levels. Risks to the view include Eurozone data remaining dismal, a BoJ hawkish move in June, or a sharp drop in equity markets, which drives safe-haven JPY gains. The 50-day moving average support at 142.3 provides the stop loss point.
CAD/NZD Trading Strategy: Bullish Channel Holds
Long CAD/NZD: Target 1.215; Stop Loss 1.165; Risk-reward-ratio of 2.3
We erred about the USD/NZD last week, believing that additional Fed and ECB hikes in rates would have increased risk aversion and rattled markets, negatively impacting on the high-beta New Zealand dollar.
In reality, the Kiwi dollar remains on strong bullish momentum against the US dollar, but its strength may be tested against the Canadian dollar (CAD).
A long position in the CAD/NZD pair is associated with a rise in WTI prices, which rallied strongly after hitting the $68 support last week, a level where the US White House hinted to buy oil to refill SPRs.
There are no significant economic statistics in Canada or New Zealand this week, with the Canadian CPI due on Tuesday, May 16.
Technically, the bullish channel that began in late 2022 is still in place, with CAD/NZD bouncing off the channel line last week, indicating that bulls remained attentive.
We prefer to play CAD/NZD rising to the channel's upper trendline of 1.215, while a break below the lower trendline of 1.165 would render this strategy invalid.