It was a mixed week for our strategies as we took on a risk-on bias on the high probability we’d see further signs of a peak in the global rate hike cycle.
But broad risk sentiment was net negative this week, and it wasn’t until we switched our stance that we saw a couple of arguably positive outcomes from Wednesday and Thursday discussions.
EUR/AUD 30-min Forex Chart by TV
On Monday, we decided to do work on EUR/AUD ahead of the fast approaching monetary policy statement from the Reserve Bank of Australia.
Market expectations right before the release shifted hawkish from a 4.10% hold to a 25 bps increase. and with Eurozone PMIs likely to disappoint and China recently announcing stimulus measures, we thought the upper end range test on EUR/AUD could draw in short-term sellers.
Our strategy was to wait for the RBA event, but EUR/AUD moved quickly lower on Monday, over 150 pips from our strategy discussion price before finding a bottom around the 1.6350 minor psychological handle. This may have been due to the sudden shift in expectations to a rate hike and/or improved Chinese PMI data, possibly coupled with weak economic data from Germany to influence the euro.
On Tuesday, we finally get to the RBA statement, holding rates unexpectedly to Monday’s expectations, and the RBA signaled to the market future policy adjustments will be data dependent. Based on the reaction in the Aussie, the market took this development as essentially “don’t expect further hikes for now.” This effectively negated the idea of further moves lower in EUR/AUD.
This development cued up our bullish technical setup discussion on EUR/AUD, which was to watch for an upside break of the top of the range on the scenario of a surprisingly dovish RBA event. It looks like this setup did play out, likely supported by broad risk-off vibes, drawing buyers throughout the week to push EUR/AUD up to the 1.6750 area before finding short-term resistance.
AUD/JPY 30-min Forex Chart by TV
On Tuesday, we looked at AUD/JPY after the RBA’s dovish statement pushed the pair lower, and based on previous RBA statements, we thought that there was a possibility of the market moving past this event quickly.
We also thought that IF broad risk sentiment moved more positively (a possibility if traders started pricing in a near-end to the current rate hike cycle), short-term buyers may see the dip as an opportunity to play that slow grind higher in the pair (minus the BOJ event related volatility from last week).
Our confirmation signal was if bullish reversal patterns formed around the confluence of technical arguments around the 95.00 major psychological area, then the uptrend could potentially resume.
Unfortunately, those conditions weren’t met as risk sentiment leaned bearish on Tuesday and gained traction on Wednesday due to Fitch’s downgrade of U.S. long-term debt. Japanese yen bulls strongly took back control due to risk-off conditions, even shrugging off surprise bond-buying operations from the Bank of Japan.
Both our technical and fundamental conditions didn’t play out to trigger potential risk management action on AUD/JPY.
GBP/JPY 30-min Forex Chart by TV
After several days of consolidation, Guppy caught our attention on Wednesday after it broke below consolidation support patterns, a move likely sparked by the negative shift in broad risk sentiment, again likely ignited by the above-mentioned news of the U.S. credit rating downgrade by Fitch, which had forex traders moving broadly into safe havens like the Japanese yen.
Our price expectations were pretty simple in that this downside break on fundamental news could draw in sellers and potentially push GBP/JPY lower to the next area of interest around 181.90.
We thought there would be profit taking there to spark a bounce to 182.64 (S1 pivot area), which did play out and surprising drew in a ton of sellers into a strong momentum move to the downside on Thursday as risk-off vibes grew.
The move bottomed out around the Bank of England monetary policy statement, where they hiked interest rates by 25 bps as expected to 5.25%, but warned that high interest rate conditions may persist for sometime.
Overall, this discussion was very effective and likely lead to a positive outcome, especially for the nimble risk managers out there.
EUR/JPY 30-min Forex Chart by TV
On Thursday, EUR/JPY was giving traders a consolidation breakout setup as the pair held steady in a 100 pip range in August. Early in the Asia trading session, bearish candlestick patterns appeared, suggesting that traders were likely to go into full bear mode.
This was likely a combination of catalysts, including weak inflation/growth signals from Europe could put pressure on the Euro, and underlying buying support for the yen triggered by the BOJ last week after they raised the upper limits of their bond buying program.
Risk sentiment was also likely a contributor, which has been leaning negative after Fitch downgraded the U.S. sovereign credit grade from AAA to AA+ on Wednesday’s, further supporting the yen over the euro this week.
In our discussion, we noted how volatility quickly picked up for the yen after the BOJ initiated a second unscheduled bond-buying operation after Japan’s 10-year bond yields hit a fresh nine-year high. This prompted a spike lower in the yen, but attention quickly turned back to broad risk-off sentiment, evidenced by traders rushing into safe havens during the London trading session.
It was actually the start of a big intraday risk off move, enough to help the bears break the consolidation support and push EUR/JPY to not only our first support target area around 156.12, but also our second target support area around 155.56 before the bulls took back control. Unfortunately, for those looking for further downside, that was the bottom of the week for EUR/JPY.
Since that test of our second target, EUR/JPY has grinded higher to likely close above our discussion price, making this a likely positive outcome only for those who managed risk with the idea of taking profits and/or reducing risk as each of the targets were hit.
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
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