Traders are already positioning themselves ahead of the FOMC on Wednesday by taking advantage of volatility around news headlines and scheduled events. As the new month opens, US equities have hit new all-time highs, but if the next central bank decision fails to impress the market, we may see a trend reversal.
Market Brief
In the overnight session, the AUDUSD fell by -0.78% as it found it impossible to break through the old head and shoulders neckline. During the first of the three big monetary policy decisions from the central banks reporting this week, Reserve Bank of Australia (RBA) Governor Philip Lowe said that an interest rate hike could occur as early as 2023, a year earlier than the central bank had estimated.
During its November meeting, the RBA also dropped its 0.1% yield target on the April 2024 government bond & plans to buy A$4 billion in government bonds every week. until mid-February 2022. In his comments, Lowe said that the RBA is prepared to "look through" spikes in inflationary levels because of the correlation between inflation and wage growth.
Lowe stated that a rise in interest rates would not necessarily imply a rise in cash rates by 2024. Also, he asserted that there is "genuine uncertainty" over the timing of future cash rate adjustments. He said that current projections do not anticipate an increase in crash rates in 2022.
The ActivTrades sentiment indicator shows that 62% of traders on the platform are still bearish, so they are having a good start to the London session. However, the daily price action is still above the daily moving averages so I am expecting a reversal higher on the FOMC news tomorrow if they fail to be as Hawkish as the market expects or has already priced in.
With the RBA holding their policy, the Australian dollar has become the weakest of the pairs across the heatmap. Currently, the Japanese yen is the strongest and there is a move into the safe havens and out of the commodity pairs. The pound is also mixed but that is largely due to the ongoing spat with Europe, which has escalated over fishing rights. Traders are going to be monitoring this morning’s manufacturing data reports from Germany and the Eurozone. The forex heatmap is signaling a risk-off day, so I am not expecting a follow-through higher for the equities ahead of the FOMC decision tomorrow.
The DAX and FTSE100 are both trading above previous levels of weekly resistance and are following the US equities higher, for now. After the RBA policy decision, the Shanghai Stock Exchange, Nikkei 225, and Hang Seng dropped which is possibly going to stop any further gains in the European bourses at the London open.
The EURUSD sentiment indicator is split 50/50 so I am going to take my trade direction idea off the USDCHF sentiment levels which are more decisive. Currently, the USDCHF sentiment is 89% bullish, so I am still looking for a drop in the US dollar to continue. This will be supportive for the EURUSD which tends to trade inversely to the Swissy.
On the EURUSD chart, the current price action is making higher highs and higher swing lows with a trend line level of resistance as a clear target for the bulls. If we get back above that level on good news today, I will wait for a breakout, retest, and continuation trade of the 1.1700 big figure. From there the double top swing highs are the next logical target from the beginning of August and September.
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