Free Profitable Forex Newsletter
Hey! This is Philip with this week's market update of the Free Profitable Forex Newsletter!
As discussed in our weekly Fx analysis, tonight’s Fed meeting is a big one. Although the June meeting will probably be much more important (at least on paper), simply because it’s the likely one when the Fed will make any big announcements it intends to make, tonight’s is the first big test and can even serve as a preview for what is to come in June. Hence, it can bring about an even stronger market reaction as today could be the earliest hint the markets
will get about future Fed policy.
However, that all being said, Powell and the FOMC will most probably try their (ABSOLUTE) best to stay as neutral as possible and to avoid causing a market reaction. That can nevertheless still happen. The reasons are simple. The Fed is getting near to the point of being cornered by its own standards. The US economy has been improving for a while and the vaccination process is speedy.
Investors are optimistic about the economy, with the first evidence already confirming their optimism. Employment continues to grow toward pre-pandemic levels, and inflation surged above 2% this month. It seems like economic data is moving toward the Fed’s objectives, and the more of it we get, the more cornered the Fed will be to reveal their tightening plans (withdrawal of stimulus).
Hawkish Scenario, More Likely, but Dollar Could Still Sell-Off If Fed Disappoints
While the Fed could refuse to talk about the “T” word at this meeting, that will not stop traders from making their own assumptions. So, it’s quite possible that we may get a big market reaction even from indirect comments by Powell. Considering the notable improvements in the US economy as of late, the probabilities favor a hawkish reading of today’s meeting. Such a scenario should translate
into some dollar strength.
The other scenario is if the Fed succeeds in their avoidance game. For this, Powell will need to be overly dovish by focusing much more on the risks to the outlook and by downplaying the improvements in employment and the overall economy. Under such a scenario, the USD would likely get crushed.
Below, we consider two potential trade ideas for the two possible scenarios. Do note that these are just two possible scenarios. It could be that the dollar will simply stay range-bound, and none of the above two materializes as expected.
Hawkish Fed Scenario: Short EURUSD (Long Dollar)
Markets want to react, and they may find a way no matter what Powell says. At the end of the day, Powell will have to acknowledge the facts, which are that the economy is doing well and inflation is getting hotter. Adding the recent fall in the dollar to the picture, and the case for a bullish USD reaction is even stronger.
EURUSD is the pair that rose steadily this month. Perhaps, it’s time for a mean reversion lower from these elevated levels?
Below we look at the EURUSD chart and potential trade setups:
Dovish Fed Scenario: Short USDCAD (Short Dollar)
As noted above, the other (dovish) scenario is if Powell talks more about the transiency of inflation and tries to minimize the improvements in the economy. The dollar would likely extend the losses steeply in this case, as markets will move out rate hike expectations further into the future.
The USDCAD pair is attractive for expressing short USD views because the Canadian dollar is one of the currencies with the healthiest fundamentals currently. The Canadian economy is also improving rapidly, and the Bank of Canada made a hawkish change to its policy last week by reducing the pace of QE purchases. Today’s retail sales reports were also above expectations, and this is the reason why USDCAD is already
breaking below its pre-FOMC range (see chart below). If the Fed is dovish, this move should extend further down, and USDCAD should easily reach 1.23, and probably 1.2250 as well in the coming days.
Trade signals from the past week
- April 8, 2021 – Short EURJPY from 129.95 on a break below 130.00, trade closed at 130.65 after several failed attempts to move in profit = -70 pips [trade idea sent on April 2]
TOTAL: -70 pips in the past week
TOTAL: +3710 pips profit since October 1, 2018
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Any opinions, news, research, predictions, analyses, prices or other information contained in this newsletter is provided as general market commentary and does not constitute investment advice. FX Trading Revolution will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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