Forex markets have moved beyond both sides of a range formed before the FOMC statement in response to this week's news. Once the liquidity on either side has been taken, with the effect of transferring orders from less informed to more informed market participants, we should expect a repricing depending on which way the data comes in next. We need a surprise today to push the market to another trading range. Those who follow trends are worried that we will simply grind sideways on data that has already been priced in and revert to the mean.
German Industrial Output came in a lot worse than expected at -3.9% for March. Expectations had been for a drop into negative territory, but the larger drop was compounded by a downward revision of the previous month. Germany is the economic engine that powers the EU but also the glue that helps the southern countries keep up with the northern European countries. They have a direct influence on monetary policy and are at the decision end when it comes to Russia and its energy exports. If the EU is to successfully ban energy imports from Russia, Germany will most likely skip a recession and go into a depression as they need energy products to keep the (economic) engine running.
The EURUSD m30 chart shows how the news was used to sweep the lows in a possible stop hunt, and I am expecting the price action to revert to the mean of the recent price range. So far, we have seen the EURUSD clear the stops above with the FOMC rate hike, and now we’re clearing out the stops below. After Non-Farm Payrolls later today I am preparing to see this range expand and ultimately for the EURUSD to continue going lower.
The intraday chart of the AUDUSD has a similar shape to the EURUSD but displays more volatility and magnitude of price moves. In the Asia-Pac session, the RBA Statement on Monetary Policy laid out the reasoning for further increases in interest rates, with the aim of restraining inflation. By the end of this year, the market will have priced in rates of 1.75% and be looking forward into 2023 for a move up to 2.5% for the bank's cash rate.
The Brent chart shows that over the last session we have been compressing higher in a channel which in my opinion is more likely to break to the downside. If we take out the recent swing low that would be a break in market structure and we could see the drop extend all the way back to $104 per barrel.
The EU is trying to place a ban on Russian oil shipping services within the next 3-months. That goes along with the idea proposed by EU Commission President von der Leyen that there will be a complete import ban on all Russian oil. Russia will have to shut in a lot of its wells soon if it cannot export the oil. They may also try to use direct access to Germany via Nord Stream 1 to try and get Germany not to agree fully to the EU proposals. It will also be interesting to see if they cut the supply of natural gas themselves to force European countries to vote against a complete ban on Russian exports. What is clear is that the Russians will have a near-impossible task of exporting oil via sea, as shipping companies will need a sovereign guarantor as insurance companies do not insure anything within a war zone.
Supply to the EU will obviously be stressed, so any pullback in prices within the energy markets I see as short-term and possible buying opportunities. Unless the EU can prove that they have secured their energy requirements and been able to fully replace Russian energy products.
Today’s focus will be the US Non-Farm Payrolls data, and when we have that we will be in a better place to look for a directional trending move. Until then I am expecting the price of everything that was dropping in the overnight session to revert to the mean higher and vice versa for those assets that were rising before the London open. On the GBPUSD chart above it is obvious to see now what the Tier-1 data points achieved in removing and absorbing pending orders as the market makers look to match their clients’ orders. For a market maker, the idea would be to get everyone back in a tightening range but if they mark it higher or lower, we just need to look left along the chart to see where the nearest swings are in anticipation of a stop run and liquidity grab.
ADP earlier this week came in under expectations, so the market is preparing for that to happen again in today’s jobs data. This means a contrarian view would be for NFP to miraculously beat expectations and for the news trading algos to spike, the US dollar higher, with the thought process being the Fed will feel more comfortable raising rates faster if the jobs data is continuing to be good.