In a tough week filled with major, major catalysts and elevated uncertainty, our FX strategists were able to arguably have two ideas play out effectively by the week close. Take a closer look at what happened and why traders had to stay on their toes this week!
On Monday, we took a look at EUR/JPY ahead of potential volatility for the euro with the upcoming business survey updates from Europe. Market expectations were for slight improvements over last month’s numbers that could draw in potential euro bulls.
But we thought that a pullback lower might be in the cards first. The pair was testing and finding resistance at the top of a rising channel, a pattern that could draw in longs to take profits or fresh shorts from short-term technical traders.
If a pullback played out, we looked out for the Fibonacci retracement area / rising moving averages (around the 156.21 level) to potentially pull in technical traders looking to play the uptrend at better prices. If that area held and drew in enough buyers back to the uptrend on positive Euro area PMI data, that would solidify our bullish bias.
Unfortunately for our bullish technical bias, Euro area sentiment data continued their negative trends, and then the ECB hit the markets with an openness to hold off on interest rate hikes in their September meeting (one of the scenarios discussed in our ECB Statement Event Guide).
These events drew in steady euro selling through the Thursday U.S. session, ahead of massive yen volatility from the Bank of Japan monetary policy statement.
Again, our bullish bias was invalidated from the get go as Euro sentiment data disappointed relative to expectations, but if you were able to adapt to that new information and risk manage properly, there’s a high chance of a positive outcome from the pair this week.
Ahead of Australian CPI data for Q2 2023, we checked out AUD/USD, which was steadily trending lower on the 1-hour chart. Expectations were for Australian CPI to come in below the previous read, potentially drawing in net sellers who may price in lower odds of future tightening from the Reserve Bank of Australia.
At the time, AUD/USD was in the process of bouncing higher, testing the SMA and Fib area, but we thought there could be further bounce to go, citing the confluence of many technical arguments, including the 50% – 61% Fib area with falling ‘highs’ pattern, the 200 SMA, and R1 Pivot area (around 0.6810) as the next technical area to watch.
AUD/USD did fall as Australian consumer inflation rates ticked lower once again, but AUD/USD found a bid on Wednesday after the FOMC event failed to spark bullishness for the Greenback. The pair actually was able to rally up to the discussed technical area, which ended up holding off the bulls and draw the bears in during the Thursday and Friday sessions, likely helped by the strong round of U.S. economic updates highlighted on the chart above.
This was arguably a net positive outcome, and based on how it was risk managed, likely a strong return-on-risk scenario if that late week sell off was captured.
We were expecting fireworks with the upcoming ECB monetary policy statement, and to express that likely burst of volatility, we spotted a few technical arguments on EUR/NZD to watch.
There were a slew of technical arguments that could draw in net buyers to the budding uptrend, most notably a confluence of Fibonacci retest, S1 Pivot area, and bullish divergence between price and stochastic between 1.7700 – 1.7800.
Aside from the technical picture, we did touch upon the ECB event, and how it could be a net bearish one for the euro based on our Event Guide discussion. That scenario would likely negate our technical long bias, so we were definitely keeping close tabs on the event.
On Thursday, the ECB hiked interest rates by 25 bps as expected, and gave euro bears something to work with as they stated their openness to hold off on another hike in September, along with hiking once again.
EUR/NZD spiked lower with the rest of the euro pairs as expected with that kind of news, but unexpectedly, the bulls were able to hold the 61% Fibonacci / major psychological level of 1.7700. And not only did they hold, but they took the pair higher to break intraweek swing highs and test the 1.7900 level.
It was a wild and choppy ride for the pair, and despite a bearish ECB event for the euro, it looks like we’ll get a net positive outcome relative to our original discussion.
On Thursday, we revisited AUD/USD ahead of a slew of U.S. economic updates, most notably the U.S. Advanced GDP read for Q2 2023 and the weekly U.S. initial jobless claims update. Market expectations for this data was to show weakness relative to Q1 2023, so a potential bearish catalyst for the Greenback if that played out.
From a technical analysis standpoint, we made arguments for both the bulls and the bears, but based on expectations of weak U.S. data ahead and the narrative of potential China stimulus coming to possibly draw in comdolls bulls, there was a slight bullish bias to our discussion.
As mentioned in our earlier AUD/USD discussion above, the U.S. hit traders with a strong round of economic updates, prompting a big bull run for the Greenback during the Thursday U.S. trading session. This surprise in economic data invalidated our slight bullish lean, and should have prompted a look at our bearish technical setup, which was a sustained move under 0.6770 as potential draw of additional AUD/USD sellers.
Overall, this strategy was very dependent on the U.S. data outcome, and if you were able to watch and react with a good risk management plan to that event scenario, the odds of a good outcome were likely in your favor.
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