EUR/USD: Less hawkish Fed and Dutch election supported EUR/USD
Macroeconomic overview
The Fed delivered its first rate hike of the year – and the third increase since late 2015, when it began to normalize its policy stance. Yesterday’s move was universally expected and completely priced in by financial markets, after the most influential Fed members had all but preannounced the move at the beginning of the month, and last week’s strong employment report removed the last faint shadow of doubt.
Given that the Fed had raised rates only once per year in both 2015 and 2016, it is now only one hike away to fulfill Chair Yellen’s recent pledge that “the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.” But the question remains, how much the pace of rate hikes is going to accelerate. Accordingly, the main focus yesterday was on the medium term policy outlook. And the latter has completely been left unchanged. First, the statement reiterated that “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.” Second, the FOMC members’ median interest projections (the “dots”) continue to signal three rate hikes for 2017 (including yesterday’s move) followed by another three in 2018. The unchanged policy outlook went hand-in-hand with an unchanged economic outlook. The updated GDP, unemployment and inflation forecast were essentially the same as in December.
The only notable changes in the statement were all related to inflation. Here, the FOMC acknowledged twice that the 2% target has basically been met. At the same time, however, the statement highlighted that the inflation target is symmetric, which means that the Committee is willing to tolerate a temporary overshoot, and that the Fed wants to see a “sustained” return to 2% inflation. This clearly helped to avoid sending a too hawkish message. Overall, the Fed now seems to be happy with its own outlook for three hikes per year, and the fact that financial markets agree with this projection.
Free Reports:
The EUR/USD was supported not-only by less hawkish Fed, but also by Dutch election exit polls that pointed to a comfortable win by the prime minister over his far-right rival.
Dutch centre-right Prime Minister Mark Rutte scored a resounding victory over anti-Islam and anti-EU Geert Wilders in an election on Wednesday, offering huge relief to other governments across Europe facing a wave of nationalism. Rutte declared it an “evening in which the Netherlands, after Brexit, after the American elections, said ‘stop’ to the wrong kind of populism.” With around 95% of votes counted, Rutte’s VVD Party won 33 of parliament’s 150 seats, down from 41 at the last vote in 2012. Wilders was second with 20, the CDA and centrist Democrats 66 tied for third with 19 each.
Technical analysis
The EUR/USD jumped yesterday after the Fed decision, pretty in line with our expectations. It broke and closed above the 1.0714 resistance (high on March 13). The rally was stopped near 1.0748, 76.4% fibo of February drop, but the momentum remains bullish.
Trading strategy
We stay EUR/USD long for 1.0820.
USD/JPY: BoJ kept its policy unchanged, as widely expected
Macroeconomic overview
The Bank of Japan maintained its short-term interest rate target of minus 0.1 and a pledge to guide the 10-year government bond yield at around zero percent. It also kept intact a loose pledge to maintain the pace of its annual increase in Japanese government bond holdings, which is JPY 80 trillion.
The move was in stark contrast to the U.S. Federal Reserve’s decision hours earlier to hike interest rates for the second time in three months in an effort to return policy to a more normal footing.
Bank of Japan Governor Haruhiko Kuroda made clear the BOJ would not follow the Fed’s footsteps any time soon, saying that Japan still needed massive monetary support with inflation distant from the bank’s 2% target and risks to growth skewed to the downside. He shrugged off market speculation the BOJ may raise its target on bond yields later this year, when consumer inflation is expected to approach 1% due mostly to a rebound in fuel costs and rising import prices from a weak yen. Instead of looking at a single price data point, the BOJ will take into account various factors like the health of the economy and long-term inflation expectations, he said.
Japan’s long-stagnant economy has shown signs of life in recent months, with exports and factory output benefitting from a recovery in global demand. Core consumer prices rose for the first time in over a year in January and analysts expect them to continue to pick up slowly but steadily. That has led to a dramatic shift in market expectations, with the market predicting the BOJ’s next move would be to start scaling back its ultra-easy policy. The BOJ may be forced to raise its yield target to avoid ramping up bond purchases if Japanese long-term interest rates track global bond yield rises, which are being driven by expectations of higher U.S. interest rates. Kuroda rebuffed such a view, saying that he does not see the need to raise the yield target just because the Fed is doing so.
U.S. President Donald Trump has accused Japan for using “money supply” to weaken the yen and give its exports an unfair trade advantage. Kuroda stressed the BOJ’s easing was aimed at beating deflation, and that interest rate differentials between Japan and the United States alone would not determine currency moves.
Technical analysis
The USD/JPY dropped after yesterday’s Fed statement, as we expected. It broke below 113.11 support (61.8% retrace of the February-March rise). 112.59 (76.4% retrace) is now unmasked for a retest.
Trading strategy
We have lowered the target on the USD/JPY short to 112.90.
AUD/USD: Fed offsets underwhelming Australian jobs data
Macroeconomic overview
Australia’s employment fell 6.4k in February against a forecast rise of 16k, while the jobless rate ticked up to 5.9% from 5.7%.
But the structure of the employment report was not that bad. The employment fall was made up of a rise of 27.1k in full-time employment, while part-time employment fell 33.5k.
The AUD/USD gained 2% on Wednesday trading in New York, after the Fed disappointed USD bulls with a less aggressive rate hike projection than they had wagered on. The AUD/USD briefly touched a three-week peak of 0.7720 where it ran into heavy resistance. It dipped nearly a quarter of a U.S. cent after a disappointing jobs report.
Technical analysis
The AUD/USD rally off the March low extends to a new high. RSIs are biased up and a long lower wick forms on the monthly candle so further gains look likely. The 7-day exponential moving average exceeded 14-day ema and both averages are positively aligned, which highlights the overall bullish structure.
Trading strategy
Our AUD/USD long is well in black now. We expect further gains in the coming sessions and keep our target at 0.7730.
NZD/USD: New Zealand’s GDP data below expectations on weaker exports
Macroeconomic overview
Statistics New Zealand said GDP rose 0.4% in October-December from the previous three months. That was below market forecast of 0.7% and the slowest growth since the quarter ended in June 2015. The miss was mostly due to heavy spring rain that cut pivotal dairy production and exports.
In October-December, exports were hit hard by a 7.5% fall in production from the previous quarter for dairy, New Zealand’s top commodity. Traditionally volatile manufacturing, mining and forestry exports also fell.
On an annual basis, fourth-quarter growth was 2.7%, lower than the market forecast of 3.1% and notably below the Reserve Bank of New Zealand’s prediction for annual expansion of 3.7% in the current quarter.
New Zealand’s economy is likely to be growing at a slower rate compared to the central bank’s forecasts over 2017. Recent GDP reading reinforces the view that interest rate hikes are quite some way away.
On March 23, the RBNZ hold a policy meeting, at which it is expected to keep the key rate at a record low 1.75%.
Technical analysis
The NZD/USD broke above 23.6% fibo of February-March drop and 14-day exponential moving average yesterday. A close above these levels today will be a strong bullish signal. The next resistance levels are: 38.2% fibo at 0.7076 and 50% fibo at 0.7133.
Trading strategy
Our NZD/USD long is still in play after yesterday’s recovery. Near-term outlook remains bullish.
EUR/CHF: SNB kept negative rates on hold
Macroeconomic overview
The Swiss National Bank kept its target range for three-month Swiss franc Libor at -1.25% to -0.25% and the rate it charges on sight deposits at -0.75%.
The SNB reiterated its vow to intervene on currency markets when needed to rein in the franc, which it said remained “significantly overvalued”. The SNB kept its forecast for the export-led Swiss economy to grow around 1.5% in 2017, but lifted its inflation forecast to 0.3% from 0.1%.
The SNB has been stepping up attempts to weaken the franc as the currency has attracted safe-haven flows from investors concerned by the potential break-up of the Eurozone. The French election starting next month has been driving demand for the Swiss currency, with anti-EU candidate Marine Le Pen leading polls ahead of the first round, although she is not expected to win the French presidency. The success of Dutch Prime Minister Mark Rutte over anti-EU candidate Geert Wilders in Wednesday’s Dutch election offered some relief to governments across Europe facing a wave of nationalism.
Technical analysis
The neutral SNB statement supported the Swiss franc and the EUR/CHF has lost all it gained after yesterday’s Fed decision. The EUR/CHF remains above 14-day exponential moving average, which is still positively aligned. On the other hand, the rejection of upward trend on March 13 weighs on the market. The nearest support levels are 1.0691 low on March 9 and 1.0688 low on March 8. A close below these levels may open the way to full retracement of February-March rise.
Trading strategy
We stay EUR/CHF long at 1.0710. We think that latest data from the Swiss economy do not allow for thinking about removing of the monetary accommodation. On the other hand, the speculations on interest rate hikes in the Eurozone are likely to strengthen.
TRADING STRATEGIES SUMMARY:
FOREX – MAJOR PAIRS:
FOREX – MAJOR CROSSES:
PRECIOUS METALS:
It is usually reasonable to divide your portfolio into two parts: the core investment part and the satellite speculative part. The core part is the one you would want to make profit with in the long term thanks to the long-term trend in price changes. Such an approach is a clear investment as you are bound to keep your position opened for a considerable amount of time in order to realize the profit. The speculative part is quite the contrary. You would open a speculative position with short-term gains in your mind and with the awareness that even though potentially more profitable than investments, speculation is also way more risky. In typical circumstances investments should account for 60-90% of your portfolio, the rest being speculative positions. This way, you may enjoy a possibly higher rate of return than in the case of putting all of your money into investment positions and at the same time you may not have to be afraid of severe losses in the short-term.
How to read these tables?
1. Support/Resistance – three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL – It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT – It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In – Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor – green “*” means high level of confidence (low level of uncertainty), grey “**” means medium level of confidence, red “***” means low level of confidence (high level of uncertainty)
5. Position Size (forex)– position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
Position size (precious metals) – position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).
6. Profit/Loss on recently closed position (forex) – is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Profit/Loss on recently closed position (precious metals) – is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
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By GrowthAces.com – Daily Forex Trading Strategies