Central bank events and global PMIs were the top drivers this week, prompting our traders to cover a wide range of currencies, with a big focus on the U.S. dollar.
Out of six discussions, three scenario/price outlook forecasts saw both fundie & technical arguments triggered to become a potential candidate for a risk management overlay. Check out our review on that discussion to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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GBP/USD: Monday – May 20, 2024
GBP/USD 1-Hour Forex Chart by TradingView
On Monday, the upcoming U.K. CPI was our first target catalyst of the week, which was highly likely to get the British pound moving as traders will likely use that outcome to reprice monetary policy expectations by the Bank of England.
Based on our Event Guide for the U.K. CPI update, expectations were for the surveys to potentially show slowing inflation conditions, and if so, a potential bullish move in EUR/GBP would shoot to the top of our watchlist. But in the case where the inflation data showed accelerating rates of price growth, the uptrend in GBP/USD would be the situation to watch for us.
Well, the data was mixed, but with Core CPI coming in well above expectations and annual rates still well above the BOE’s 2.0% rate, it looks like the markets took the update as net hawkish, signaled by the spike higher in Sterling across the board.
This outcome triggered our long GBP/USD bias, but with more top tier events from both the U.S. and U.K., the following price action remained choppy through the rest of the trading week. This was likely mainly due to the surprisingly strong U.S. PMI update on Thursday, which dragged lower momentarily.
On Friday, net weak U.K. retail sales data hit the wires, but broad risk-on/anti-Dollar behavior appeared (without a direct major catalyst, so likely profit taking before weekend), and far outweighed the U.K. update. GBP/USD moved back above the pre-U.K CPI levels/inline with post event levels, to the top of the intraweek range before the week’s close.
Overall, we’d rate this strategy/price outlook as “not likely to neutral” in terms of being supportive of a net positive outcome. GBP/USD mostly traded below the post U.K. CPI event price throughout the week, but for those who waited for dips to play the long side with the fundies, the odds of a positive outcome were likely much better.
NZD/JPY: Tuesday – May 21, 2024
NZD/JPY 1-Hour Forex Chart by TradingView
On Tuesday, our strategists prepared for the only official central bank statement this week, the latest monetary policy decision from the Reserve Bank of New Zealand. Our Event Guide for the RBNZ statement saw the most likely scenario as one where the central bank still sees inflation pressures, which are likely to be tamed by signs of weakness in the labor market. With a balanced picture, odds are that RBNZ will continue to hold and maintain neutral-to-slightly-hawkish rhetoric.
In the case where we did see neutral-to-hawkish RBNZ outcome, the uptrend in NZD/JPY was the top of our watchlist. And for a surprise dovish turn scenario, a potential upside break in EUR/NZD was also on our radars.
Well, as discussed in the Event Guide, the RBNZ did come out with an arguably hawkish hold statement, mainly discussing an openness to rate hikes at this meeting. This prompted a big spike higher in the New Zealand dollar, gains which remained steady for the rest of the week against most of the majors.
Following the event, NZD/JPY did pullback, but this was likely driven by a round of broad risk-off sentiment, arguably stemming from lots of rhetoric from the Federal Reserve that rate cuts may come much later than the markets think.
But this pullback and the one on Friday seemed to have been buying opportunities for traders looking to play the specific fundamental stories in both the Kiwi and Japanese yen.
Overall, we think that this discussion was “likely” supportive of a net positive outcome given that NZD/JPY both traded at the week’s high at the Friday close. But given the intraweek choppiness due to external drivers, we think that risk/trade strategy and execution would have been an important factor towards achieving a net positive outcome.
USD/CAD: Thursday – May 23, 2024
USD/CAD 15-min Chart by TradingView
For our final target catalyst of the week, our strategists took a look at the upcoming U.S. Flash PMI updates for potential opportunities in U.S. dollar pairs.
According to the Event Guide, market expectations were that the odds favored overall tick higher in U.S business sector optimism outcome, but with several U.S. regional surveys showing weakness, a net tick lower outcome has odds of playing out as well.
In the case where we do see better than expected sentiment from U.S. PMI survey results, our focus would then be the short-term uptrend in USD/CAD, mainly due to recent Canadian CPI data coming in weaker than expected.
In the case where U.S. PMI results come in lower than expectations, the uptrend in NZD/USD would hit the top of our watchlist for the session.
Well, the U.S. PMI updates came in hot and hit the markets hard as both manufacturing and service sector updates came in better than expected and previous readings. The services sector update especially notable coming in at 54.8 vs. 51.3 April read (which was upwardly revised from 50.9).
This obviously triggered our USD/CAD long setup, as well as sent risk assets lower in the broad markets. The move was limited though as traders seemed eager to take profits on Friday after the U.S. dollar’s dominating week, sending USD/CAD lower ahead of the weekend after testing and stabilizing around the the R2 Pivot resistance area late Thursday.
Given that USD/CAD strongly rallied after the U.S. PMI update and reached the max target discussed in the original post, we’d rate this discussion as “likely” supportive of a net positive outcome. We think that because of the the market reversing on Friday, risk/trade management would have been a factor in the outcome.
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