Markets have been on a roller coaster ride. Here are our latest forex trading ideas.
Markets overviewRisk sentiment remains weak and safe-haven assets continue to prosper, despite the UBS acquisition of Credit Suisse and emergency measures by major central banks announced over the weekend.
Last week, gold surged 6.5% in a classic safe-haven rally, shattering the psychological level of $2,000/oz and marking its second-best week since April 2009.
Among major currencies, the Japanese yen (JPY) is emerging as the outperformer, gaining 2.5% on the week versus the USD, following the collapse in U.S. Treasury yields and Fed rate hike expectations.
On Sunday, a forced acquisition of Credit Suisse by UBS for around USD 3.3 billion was orchestrated by the Swiss government in reaction to customer exodus and a sharp decline in the target company's shares and bonds.
Later in the day, the Federal Reserve and five other central banks announced coordinated steps to increase liquidity in US dollar through swap agreements in order to ensure global financial system stability.
Despite recent reassurances, investors remain wary of a new financial crisis since the stability of the world's banking system remains unclear and additional financial institutions may see a run on their deposits in the coming days.
This week, all eyes will be on the FOMC meeting scheduled on March 22.
With the upheaval in the US banking sector and the failure of a few banks, including Silicon Valley Bank, Silvergate, and Signature Bank, uncertainty about the Federal Reserve's interest rate policy path mounted.
The market consensus currently seems to be leaning toward a milder 25 bps rate hike in light of fading inflationary pressures and the recent banking turbulence. Yet, Fed members must make a difficult trade-off between continuing their battle against inflation or pausing to prioritize financial stability.
Markets have already priced in a pause after March and three 25bps cuts until December 2023.
The Bank of England also meets this week (March 23), and the markets expect a 25bps rate hike to 4.25%.
Here are the trading ideas for the week.
EUR/USD Update: Holding short but watching Powell
Last week, we discovered a short EUR/USD signal after the formation of a head-and-shoulders top pattern.
The euro failed to advance meaningfully after the ECB raised interest rates by 50 basis points last week, despite assurances that the EU banking sector is sound and well-capitalized.
We believe the EUR/USD bearish trend is going to persist, albeit much will rely on the Fed's statement on Wednesday.
If the Fed betrays expectations for further rate cuts while underlining the need to battle inflation, the Dollar will surge broadly.
On the other hand, if Fed Chair Powell's tone is more cautious and stresses the need to suspend rises and give more liquidity to a system in crisis, market expectations will be validated, and the dollar may see selling pressure.
The stop loss is set at 1.0773, while the take profit is set at 1.04, for a risk-reward ratio of 2.8.
Short EUR/USD: TP1 1.04; SL 1.0773 (risk-reward ratio 2.8).
GBP/JPY Update: Playing it safe
Since risk sentiment remains shaky, we believe there is an opportunity for more selling pressure on growth currencies such as the British pound (GBP), while inflows into safe havens such as the Japanese yen continue (JPY).
We initiated a GBP/JPY short last week after identifying a descending channel pattern, which is now holding nicely.
We warned that a breach of the support at 160 levels would have opened the door to additional downside for the pair.
While GBP/JPY is currently trading precisely at this level, we maintain a bearish view, which is supported by a daily RSI heading southward and breaking below 50, as well as a breach of the 50-day moving average.
We would take profit at 155.5 due to the presence of a solid support line (May 2022 lows, and double low in January 2023).
Stop loss is set above Friday's March 17 closing of 161.8, for a risk-reward ratio of 2.7.
Short GBP/JPY: TP 155.5; SL 161.8 (risk-reward ratio 2.7).
USD/CAD Long Idea: Target 1.40 as CAD looks overvalued
The Canadian dollar has been rather steady last week, despite rising global risk aversion, mounting recession worries in the United States, and a steep drop in oil prices.
WTI crude plummeted to $65 per barrel, amid rising fears of a demand recession.
We believe that CAD fundamentals must realign with the new reality, which might provide a chance for USD/CAD to move higher.
Since mid-February, the pair has formed a fresh ascending channel, which might make the highs of October 2022 at 1.40 an appealing target to attack.
If we witness a more hawkish than predicted Fed and greater risk off in global stocks and cyclical commodities, the chances of a positive trend in USD/CAD will be boosted.
We set the stop loss at 1.3647, just below last week's low, for a risk-reward ratio of 3.64.
Long USD/CAD: TP 1.40; SL 1.3647 (risk-reward ratio 3.65).
XAU/USD Long idea: Gold to replace King Dollar as safe haven in 2023?
The price action in gold last week was spectacular, with a 6.5% rally for the week, and the bullish case for gold is strong from both a fundamental and technical aspect.
Increasing bank and corporate failures raise the attraction of non-defaulting assets such as gold, while a halt in central bank tightening and a drop in US Treasury yields act as a tailwind for precious metals.
If the present banking crisis leads to a new financial meltdown, gold may be in for a perfect storm.
From a technical viewpoint, there have been several notable technical breakouts, as well as the construction of a bullish-flag pattern that might lead to a move over $2,100/oz.
Gold easily smashed the 50-dma resistance, moved past April 2022's high of $1,978/oz, and briefly exceeded the psychological 2,000/oz milestone, before retreating somewhat on Monday after hitting RSI overbought conditions.
We believe the bullish momentum is still intact, and we are eager to trade long XAU/USD, with a profit target of $2,110/oz and a stop loss of $1,917/oz just below the closing on Friday, March 17, for a risk-reward ratio of 2.2.
Long XAU/USD: TP 2,110; SL 1,917 (risk-reward ratio 2.2).
*These are written to provide insights about the market but do not constitute investment advice.