This week, the calendar served up a heavy load of top tier catalysts, and our strategists decided to focus on the Australian CPI update and Bank of England monetary policy statement for this week’s price outlook discussions.
Out of the four scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. Check out our review on that discussion to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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AUD/JPY: Monday – July 29, 2024
AUD/JPY 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the Australian CPI update for Q2 2024 and its potential impact on the Australian dollar. Our Event Guide pointed to the update signaling a relatively mixed change in consumer prices, with expectations of the yearly CPI to edge up slightly from 3.6% to 3.8%, while the quarterly rate was predicted to hold steady at 1.0%.
Based on that, we had two main scenarios in mind:
1. The “Aussie Avalanche” Scenario: If the CPI came in as expected or lower, we figured the RBA might start eyeing those rate cut scissors. This could draw in fundamental AUD sellers, and we had our eyes on AUD/JPY for this particular scenario, given the pair’s downward momentum and the yen’s recent flex after some hawkish whispers from the BOJ.
2. The “Kangaroo Bounce” Scenario: If Australia’s inflation growth decided to play tough and come in hotter than expected, we thought the RBA might keep those rate hike dreams alive. This could’ve been AUD buyers’ time to shine, prompting us to lean towards putting a risk plan on AUD/NZD given the uptrend and recent bearishness on the Kiwi lately.
So, what did we get? Well, Wednesday rolled around, and the Australian CPI decided to throw us a curveball that would make even Shane Warne proud.
The CPI update showed the quarterly rate holding steady at 1.0%, while the annual rate ticked up to 3.8% as expected. But here’s where it gets interesting – the RBA’s trimmed mean CPI (the one they really care about) came in lower than expected at 0.8% q/q and 3.9% y/y.
The market reaction was swift. The Aussie bounced a bit on the event, possibly a “sell-the-news, buy-the-fact” reaction given the broad weakness in AUD leading up to the event. It also could have been some profit taking ahead of the highly anticipated monetary policy statement from the Bank of Japan, which turned out to be a hawkish outcome for the yen as the BOJ announced their decision to hike rates by 0.15% from <0.10% to <0.25% while policymakers agreed to taper bond purchases to 3 trillion JPY by Q1 2026.
Our AUD/JPY bearish bias got triggered both fundamentally and technically, and the pair drew in solid selling behavior pretty quickly after the events. In our original discussion, we noted the 98.11 (S1) support level as a possible target for sellers, which got tested quicker than a kangaroo spotting a tasty bit of grass. Our second target, Pivot support S2 around 95.54 was also tested right before the weekly close.
So, how’d our discussion go? In our opinion, this strategy was “highly likely” supportive of a net positive outcome. The market moved as we expected, ticking both our fundamental and technical boxes. The pair’s downtrend continued with few bounces thanks to the targeted event outcomes and broad risk-off market environment, prompting AUD/JPY to hit our predicted support levels, and the BOJ’s less dovish tone added extra oomph to the yen.
GBP/CHF: Wednesday – July 31, 2024
GBP/CHF 1-Hour Forex Chart by TradingView
On Wednesday, our strategists had their radar locked on the Bank of England Monetary Policy Statement and its potential to light a fire under the British pound.
First, let’s chat about the BOE decision. Based on our work in the Event Guide, we saw that BOE members and the markets were pretty divided on whether to cut or not, creating a wide range of potential outcomes (and elevated volatility for Sterling) for this event.
As usual, we cooked up two main scenarios to watch:
The “Sterling Stumble” Scenario: If the BOE cut rates or came across as dovish, we figured this could draw in fundamental GBP sellers. We had our eyes on GBP/CHF for this particular scenario, given the pair’s downward momentum and the broad risk-off environment.
The “Pound Bounce” Scenario: If the BOE surprised with a hawkish hold or less dovish than expected stance, we thought this could be GBP buyers’ time to shine. We were keeping tabs on GBP/NZD for this curveball, given the bearish pressure on Kiwi lately and the risk aversion environment.
So, what did we get? Well, Thursday rolled around, and the BOE decided to spice things up with a “finely balanced” 25 basis point rate cut, bringing rates down to 5.00%. The unexpected 5-4 vote outcome added an extra layer of drama to the decision.
The market reaction was more dramatic than a Shakespeare play. GBP pairs initially bounced through the statement & press conference, but sellers returned overall, likely broad market sellers choosing safe havens over the pound given the broad risk-off vibes.
Our GBP/CHF bearish bias got triggered both fundamentally and technically. After the brief recovery attempt, the pair continued its downward journey with the determination of a Swiss train schedule. It smashed through S2 and S3 levels in the days following the BOE rate cut, making our analysis look sharper than a Swiss cheese knife.
So, how’d our discussion go? Well, in our opinion, this strategy was as successful as finding gold in the Swiss Alps. We’re giving it a “highly likely” rating of being potentially supportive of a net positive outcome.
Our bearish bias was spot on, with both fundamental and technical arguments aligning like the gears in a Swiss watch, and with the help of the broad risk-off environment, the pair saw a strong momentum move in favor of sellers with no pullbacks in sight!
For both AUD/JPY and GBP/CHF, simple trade and risk management plans with little adjustments required would have likely yielded a positive outcome, with opportunities for solid return-on-risk ratios given the strong momentum in both cases.