Central bank events and inflation data updates were the catalysts of choice this week, prompting our strategists to focus on the Kiwi dollar and the Greenback.
Out of the four scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become a potential candidates for a 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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GBP/NZD: Monday – July 8, 2024
GBP/NZD 1-Hour Forex Chart by TradingView
First, let’s chat about the Reserve Bank of New Zealand’s recent monetary policy announcement. We had our sights set on this one, expecting the RBNZ to keep things pretty steady – holding interest rates and all that. Why? Well, the economy was ticking along nicely, even if the business sector was feeling a bit under the weather.
We cooked up two possible scenarios:
1. The “As Expected” or “Dovish” Scenario: We thought GBP/NZD might be the way to go here. The UK was showing off some impressive economic numbers, and we had a good feeling about their upcoming GDP report.
2. The “Hawkish Surprise” Scenario: For this curveball, we were keeping an eye on NZD/CHF. The Swiss had just cut rates, so we figured the Kiwi might have a chance to shine.
So, what did we get? The RBNZ served up a “dovish hold”. They kept rates at 5.50%, but started singing a softer tune about inflation cooling off and the job market getting a bit tighter.
The market reaction was swift. The Kiwi dollar took a dive, and GBP/NZD shot up, breaking through the intraweek swing high 2.0960 faster than you can say “fish and chips”.
But here’s where it gets interesting – Bank of England members hit us with surprise with some hawkish rhetoric, including their Chief Economist, Huw Pill, who basically suggested we shouldn’t get too excited about rate cuts in August just yet.
So, how’d our discussion do? In our opinion, this discussion was “highly likely” supportive of a net positive outcome. Our GBP/NZD long bias played out smoother than we could have hoped thanks to how the catalysts and outcomes played out from both the U.K. and New Zealand, and the momentum carried the pair higher for another 1.15% move post event candle.
And even the traders who hit the snooze button and joined the momentum late still probably ended up with some decent gains without needing to be complex with a trade management plan or needing active execution.
AUD/USD: Wednesday – July 10, 2024
AUD/USD 1-Hour Forex Chart by TradingView
On Wednesday, our strategists focused on the highly anticipated U.S. CPI update and its impact on the U.S. dollar.
First, let’s chat about the U.S. CPI update for June. We had our sights set on this one, expecting it to potentially show a slowdown in consumer prices. The market was playing a bit of hot and cold with their expectations – thinking the yearly CPI might ease from 3.3% to 3.1%, but the monthly rate could tick up slightly from 0.0% to 0.1%. Meanwhile, core CPI was expected to stick to its guns, remaining stubbornly high.
As usual, we cooked up two possible scenarios to watch:
1. The “Cool as a Cucumber” Scenario: If the CPI came in as expected or lower, we figured the Fed might start eyeing those rate cut scissors. This could send USD sellers into a frenzy. We had our eyes on AUD/USD for this particular scenario given the currency pair’s upward momentum and the Aussie’s recent flex after some strong CPI data down under.
2. The “Sticky Situation” Scenario: If U.S. inflation growth decided to play tough and come in hotter than expected, we thought the Fed might keep those rate cut dreams on ice. This could’ve been USD buyers’ time to shine. We were keeping tabs on USD/CAD for this curveball, what with the Bank of Canada’s recent dovish turn and a tempting descending triangle pattern that might’ve lured in some technical sellers on a downside break.
So, what did we get? Well, Thursday rolled around, and the U.S. CPI decided to throw us a different type of curveball. Consumer prices took an unexpected dip in June, dropping 0.1% month-over-month. This was the first decline since the pandemic kicked off and a far cry from the expected 0.1% increase. Even when we strip out the volatile stuff, core CPI came in at a cool 0.1%, missing the mark of holding steady at May’s 0.2%.
The market reaction was swift. The greenback took a dive against the major currencies faster than you can say “rate cut,” with the odds of a September Fed rate cut jumping to 84.6% from 70%. But here’s where it gets interesting – the USD’s nosedive was short-lived. Maybe it was weakness in U.S. equities sparking some safe-haven behavior, or perhaps some traders decided to take their profits and run.
Our AUD/USD long bias got triggered, both fundamentally and technically. We’d noted the R1 Pivot resistance level at 0.6789 as a possible target, which got tested quicker than a kangaroo on a pogo stick, right within the event hourly candle.
So, how’d our discussion do? In our opinion, this strategy was “neutral-to-likely” supportive of a net positive outcome. The market moved higher as we expected, ticking both our fundamental and technical boxes. But it was like trying to catch a shooting star – that initial move was too fast for most to act on.
The real make-or-break factor here was the trade management plan. Traders who kept their cool and waited for the pullback to the 0.6760 level before hopping on the Aussie train likely ended up with some decent gains. But for those who jumped in right after the news broke? Well, they might’ve had to white-knuckle through the pullback and bounce before possibly breaking even or ending up slightly in the red.
In the end, this forex strategy shows that sometimes, even when you call the market direction right, timing is everything. It’s not just about being right, it’s about being right at the right time – and having a solid trade management plan to back you up!
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.