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The Fed is being pushed to raise interest rates by traders as US yields rise to boost the US dollar.

The recent inflation data combined with positive jobs data has accelerated US yields higher, and history shows that the Fed generally follows the markets rather than the other way around. The diverging yields between the Euro Area and the USA are adding pressure to the downside for EURUSD and that is lifting the US dollar index higher too.

Market Brief

Friday is finally here and hopefully, everyone has survived the trading week. There has been a decent amount of volatility and the US dollar is creating some good trending moves across the currency pairs. EURUSD and GBPUSD are at year lows and the commodity pairs are moving too.

The economic calendar has a smattering of data points and I suspect the European ECONFIN meetings may keep the euro currency trades subdued. This morning German Wholesale Prices rose month-on-month to 1.6% and came in higher than the expected 0.6%.

Later, in the day the US session brings the JOLTS Job Openings report and a Preliminary University of Michigan Consumer Sentiment and Inflation Expectations. Sentiment and Inflation expectations have been trending higher and there is a real possibility this accelerates.

The forex heatmap shows no clear directional moves in terms of risk-on or off, but the pound and Australian dollar are bid and the Swiss franc and Canadian dollar are offered.

The GBPCAD is range-bound on the higher time frames and for range traders buying the lows of this pair around 1.6800 have proven profitable over the years.

Traders are looking to the fixed income markets to work out what the consensus is on central banks raising rates as inflation remains elevated and, in some cases, accelerating higher. Currently, the US treasury yields are nominally positive whereas the major Euro Area yields are nominally negative. This interest rate differential always works in favor of the EURUSD short trade over the long term and we’re starting to see the price action in the EURUSD reflecting the consensus that the Fed will have to raise rates sooner rather than later.

The ActivTrades sentiment indicator shows that 69% of traders are bullish on the EURUSD which for a contrarian trader like me means we’re going lower. Yesterday the continuation of the breakout of the recent swing lows would have normally been a run on these traders stops but as they are still hanging in there, there could be a larger move lower to really squeeze the retail traders.

The EURUSD is currently making lower lows and lower highs, the price action is below significant levels of prior support and resistance, and the price action is under the daily 20, 50 & 200 EMA’s, showing momentum is clearly to the downside too. On any relief rally, I am considering it as an opportunity to sell the rips.

The GBPUSD could have stopped some weak hands out with yesterday’s aggressive breakout below the swing lows. The ActivTrades sentiment indicator shows that the bulls and bears are relatively balanced, so this could be an opportunity to buy the lows next week, should we close back inside the recent range after what could be a false breakout. For trend followers, a more conservative trade would be after a breakout to the upside of the recent range when the price is making higher swing highs and higher swing lows.

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