If you have been day trading these last few days, well done if you did not blow up an account. For those in an EOD trade from last week, we should be able to move out of these tightening ranges and start making some progress either towards our Stop at speed or towards a Profit Target. There is nothing worse than being stuck in a trade apart from being chopped up in many trades. The market is pretty good at pricing in well-flagged data points and the 50bps rate hike expectations have been priced in. What we need to know now is how serious they are at getting towards 2.75% or above. And what we need to reprice should they be more dovish.
Market Brief
It is FOMC day today, which may be the most important day of the year, barring the upcoming mid-term presidential elections, as the Federal Reserve gives forward guidance regarding how hawkish it really is. Assuming the results come in as expected, the market has already factored in the changes. If they do not meet expectations, the US dollar, US benchmark yields, and inflation-sensitive assets will reverse their current trends.
The Federal Reserve is expected to announce its second consecutive rate hike, but this time by 50 basis points. Additionally, the market anticipates more of the same for the coming months, and the IMF has warned that to combat the escalating inflation, interest rates may need to be raised to 5%. This would be unusually aggressive, but many Fed policymakers have signaled their support for at least 100 basis points over the coming months, with a rhetorical target of 2.75%, so any movement back from their aggressive position would be more surprising. The London session has seen an increase in volume following the Asia-Pacific session with many Asian equity markets closed for holidays.
According to the latest New Zealand jobs report, businesses are reporting difficulty recruiting. This may be eased by the reopening of the borders. The NZDUSD has been particularly hit by the strength in the US dollar but is currently compressing below the 0.6500 level with 0.6400 possibly major support. April’s close was below the Bollinger band so I am expecting further downside, towards the 0.6000 big figure but would rather get in higher around the 0.6700-0.6800 zone.
The economic calendar has already had quite a lot of data points and the rest of the day will see more economic releases, but we should be mindful that any moves will be subject to a mean reversion ahead of the Fed. Despite higher inflation and interest rates, UK March money supply and lending data will show a decline in the money supply. It remains to be seen if individuals can obtain credit under these circumstances.
The monthly GBPUSD clearly closed below the lower bound of the Bollinger band, so again, I am expecting further long-term weakness but would rather take that short trade from the 1.3000 level or the March low, should it act as resistance. The Bank of England announce its rate decision tomorrow, so we could either add to the directional moves that occur after the Fed today or reverse them. Which is a long way to say, it’s better to wait until we have all the info next week.
Yesterday, US government bond yields rose, with 10-year yields touching 3% at one point. Major currency market crosses were little changed on the day with the US dollar holding close to recent highs versus the euro and sterling. The price action on the charts was frustrating, as we kept taking out intraday swing highs and lows before reverting back into the trading ranges, but no real trending moves occurred as the US dollar kept hugging its recent highs. The ranges over the last few days have compressed, so I am expecting initially a false breakout, and then a trending move to occur.
We have NFP to also look forward to this week on Friday, with today’s US ADP figure hopefully able to shed some light on what we can expect.
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