It was a solid week for our strategy discussions, with three out of five target markets behaving relatively close to expectations. This was largely due to expected weakness in Sterling and another round of broad market risk aversion vibes starting on Wednesday.
Forex Setup of the Week: Brewing Reversal on GBP/NZD? – May 8, 2023
GBP/NZD 4-Hour Forex Charts by TV
We discussed the potential of a round of pound weakness against the Kiwi on Monday, particularly if New Zealand prints a rebound in inflation expectations. We also noted a chart setup that may draw in technical sellers, a head and shoulders pattern, suggesting a possible reversal on the four hour time frame.
The downside break did come, likely due to rising short-term sentiment on Sterling, but that was quickly reversed on Friday after New Zealand printed not only lower inflation conditions ahead, but also contractionary manufacturing conditions in April. GBP/NZD spike higher on NZD weakness as a result.
Given that this setup is on the 4-hour chart, this may still turn out to be a reversal in the making for swing / longer-term players, but with the weak reports coming from New Zealand sparking a strong bearish reaction, being long the Kiwi doesn’t make much sense at the moment.
CAD/JPY: Tuesday – May 9, 2023
CAD/JPY 30-Min Forex Charts by TV
On Tuesday we focused on the CAD/JPY currency pair, pointing out resistance patterns on the chart, and a potential reversal back to the downside if risk sentiment shifted negative and oil price turned lower on the week.
After posting this analysis, price actually stalled around the 101.00 area before breaking down on Wednesday, correlating with oil prices falling after the EIA reported a surprise rise in oil inventories of 3M barrels vs. an expected draw 1.1M barrels.
On Thursday, broad risk aversion sentiment grew after weaker-than-expected U.S. data and rising regional banking fears, likely pushing more buyers than sellers in the Japanese yen to push CAD/JPY lower, appearing to bottom out around 99.40 on Friday.
Depending how this was risk managed, this move should have done very well for CAD/JPY bears.
GBP/AUD: Tuesday – May 9, 2023
GBP/AUD 1-Hour Forex Charts by TV
In this article, we saw a potential countertrend setup in the GBP/AUD currency pair. The pair has been in an uptrend over the past two months, creating a pretty clean channel pattern on the zoomed out 1-hour chart.
But we thought that channel may be broken on expectations of Sterling weakness, a tendency in behavior we’ve recently seen around Bank of England monetary policy statements. We also noted potential resistance at the Fibs if sentiment did shift, and that U.S. CPI may cause enough broad FX volatility to bring GBP/AUD up to those levels.
The U.S. CPI event wasn’t enough to bring the market up to the Fibs, but we did see the market get up there on Thursday, just in time for the Bank of England’s monetary policy statement. As discussed in our Bank of England Event Guide, despite another rate hike, the event drew in a broad negative reaction on Sterling.
Unfortunately, for GBP/AUD bears, that event was countered by broad risk aversion sentiment hitting the markets on Thursday to weaken the Aussie more than Sterling going into the weekend.
This technical setup may be appropriate to remain on a watchlist, but not likely a good trade until global risk sentiment shifts back to positive and/or we see catalysts from Australia supporting rate hike speculation from the RBA.
NZD/USD: Wednesday – May 10, 2023
NZD/USD 15-Min Forex Chart by TV
On Wednesday, we saw a potential opportunity for NZD/USD bears as the market was riding the bottom of a rising channel, but stochastic and moving averages were close to signaling a potential bearish move ahead.
It wasn’t too long after the post that we saw a downside fakeout then return to the rising channel. But on Thursday, the true breakout came as previously discussed risk aversion sentiment hit the markets, correlating with weekly jobless claims that supported speculation of a possible peak in the tight U.S. jobs market.
NZD/USD broke consolidation and proceeded to drop like a rock, likely with the help of weaker-than-expected data from New Zealand on Friday, to take the pair from trading right under 0.6400 Wednesday to below 0.6200 in just a couple of days.
EUR/GBP: Thursday – May 11, 2023
EUR/GBP 15-Min Forex Chart by TV
On Thursday, we were watching EUR/GBP on the 15-minute chart ahead of the Bank of England’s monetary policy statement, eyeing a possible long opportunity on the pair IF the BOE signaled “lower growth and employment estimates.”
We also discussed a potential support area to watch was the S1 Pivot point level of the day at 0.8680 as a potential area to draw in buyers and take the market back higher to the 0.8700 – 0.8730 major psychological area.
The market actually picked up in volatility ahead of the BOE event, actually touching our watched potential support area around 0.8680 before stabilizing and reversing.
And as with previous BOE events, traders pushed Sterling broadly lower on the session as BOE Governor Bailey hinted that the point where the BOE may pause rate hikes is approaching.
EUR/GBP spiked higher on the event, eventually stabilizing around our target resistance area discussed earlier in the post.
This was likely a good strategy for those risk managers who stayed focused and nimble, and executed entries and exits appropriately around this event. Congrats if that was you!
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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