ALL BETS ARE OFF... I started last week in good form +627 pips for the month so far, during the week I more than doubled that total with banked pips from closed / completed trades, but the FOMC “Hawkish Surprise” has put the cat amongst the pigeons.
I waited for what I believed was common sense to prevail as I could not see how the FOMC reaction was BULLISH for the USD. Inevitably, I reached the point when I said to myself, cover and re-build again. This move basically entailed covering a CORE POSITION trade (USD/CAD) and a RADAR TRADE (EUR/NZD). In total I booked -1,015 pips loss on a multi-trade USD/CAD position and a -380-pip loss on a multi-trade EUR/NZD position.
My monthly position for pips is now a negative -123 pips. So, now its about building pips back again. Like most traders I recognized with the benefit of hindsight that I could have taken avoidance action earlier and saved myself a few hundred pips of losses, but I am human like everyone else, and what I believe about how the markets should react to news events counts for bugger all. When several layers of what I believed to be reasonable levels of support or resistance are broken, it was time to wake up and smell the coffee! One must get over the thoughts that at the next level the trade will turn, momentum into the weekend was so strong against me, it was time to move on.
What was really bugging me was this...
Every time I write Hawkish alongside the FED, I know deep down I don’t mean it. What I mean is potentially 2 x interest rate hikes in 2023 and TAPERING looking like it could start in Q1 or Q2 2022, is NOT HAWKISH now. From now until the first action the FED remains uber dovish. The market has gotten itself way ahead of the events. The rally in the DXY to be truthful, brought volatility to the FX market and flushed out lots of positions, which must be good for a reset, but I am still struggling to come to terms with the fact that 2 interest rate hikes, possibly in 2023, could be bullish news for the DXY
Look, the market is what it is and as traders we operate in the market, and we play the hands we are dealt... but really.... come on... this is just a major over reaction and to me it’s just a nonsense.
I am a little annoyed with myself, I was waiting for a huge reversal based on sense to happen that just did not appear.
So, ALL BETS ARE OFF, OR ARE THEY?
I think after a few days and possibly over the current weekend the larger institutions, which had position squared very heavily in front of the FOMC will reset and strategize the summer. There could be a lot of course correcting taking place over this weekend looking into the summer months.
To be conservative, I am NOT adding new positions until we see a few sessions this week under our belts, and I still maintain that even with a “Hawkish Surprise” the markets will slow down for the summer months. I am sticking to my Jackson Hole and FOMC September 22nd meeting to be the next possible market moving events regarding FED policy chnages.
The FED action last week does raise a few questions vis-à-vis how the other major G10 Central banks react and instead of a trading pair suggestion this week, I am going to give you my thoughts on the other Central Banks and the implications as I see it instead.
What has further exacerbated the FED reaction was when FOMC members started to break ranks within 48 hours of Powell’s announcement and Press Conference. This move reminds me of the issue Mario Draghi had when ECB President, he constantly had to compete with numpties from the ECB board undermining the collective decision. Over recent weeks I have found FED speak in the U.S. is just painful, the desire for 5 minutes of market moving sound bites only serves to service members ego’s nothing else.
1. THE SOAPBOX: ALL BETS ARE OFF OR, ARE THEY?
This weekend, I am spending my research time looking at the weekly candles across several pairs, but I want to see a few sessions complete before establishing new trades.
So, I want to look briefly, a little deeper, keeping it light, at how the FED announcement could affect the other major Central Banks. As always, I try to keep my thoughts as straightforward and easy to negotiate as possible.
Like it or not the FED influences basically everything financial in the world, we may not believe it, we may not like it, we may even try and deny it but it's a fact. Every other major Central Bank around the world is influenced by FED policies and actions. The Monetary Policy Statements and Press Conferences by Jerome Powell are as eagerly read and watched by Jerome Powell’s peer group as you and I. I have no doubt he lets his closest allies in ahead on what’s happening but at the end of the day the old notion of “when the FED sneezes the other Central Banks get colds” still applies.
So, let’s assume that the FED is about to turn HAWKISH. I know its 18 months to 2 years away but let make this assumption for the purpose of my opinions that follow.
The other Central Banks that count can be split as follows into two groups: -
- ECB, BOJ and BOE.
- RBA, SNB, BOC, RBNZ, NORGES and RIKS BANK.
I do not like to pigeonhole, but for the purpose of this piece its easier to follow, I hope.
The first place to start is to look at the above Central Banks and designate which are DOVISH in outlook, and which are HAWKISH in outlook and those who don’t know or cannot make their mind up!
BOE: About to turn HAWKISH
SNB: NOT SURE... In a league of their own!
NORGES: About to turn HAWKISK
RIKS BANK: About to turn HAWKISH
Including the FED, there are 10 Central Banks.
2 = HAWKISH
4 = About to turn HAWKISH (includes the FED)
3 = DOVISH
1 = NOT SURE
Basically, forgetting timescales for now; 60% of the major Central Banks are in HAWKISH mode or have at least notified a change in Monetary Policy and from my perspective this opens the debate about what do the other 4 Central Banks do, how do they react over the coming months to the change in FED policy?
For those Central Banks already HAWKISH....
The point to note here is that for RBNZ and BOC which were already HAWKISH, a fat lot of good that has done vis-à-vis the currency reaction post FOMC. Both the NZD/USD and USD/CAD weakened considerably.
However, are these moves temporary, will these two pairs in particular reset first? Personally, I believe that they will lead the market stabilization when that happens.
Moving on to those Central Banks that are DOVISH....
The intrigue of the FED move effects, in my opinion, the ECB the most. The BOJ has always just been DOVISH and will remain so for long, long, long into the future.
The ECB is now under the microscope to see how it reacts.
Right now, the likes of Philip Lane and Christine Lagarde will be pouring champagne over their Sunday morning cornflakes. The FED move has weakened the EUR. Happy days for all at the ECB. The Fed has achieved what they could NOT achieve. The EUR/USD is now sub-1.1900, mid 1.1800s, although there are areas ahead that should provide some support, maybe even a meaningful bounce.
As for the other Central Banks that are turning HAWKISH...
The other Central Banks, like the Bank of England, Norges Bank and Riks Bank having had their currencies nicely weakened courtesy of the FED can move to normalize without fear of strengthening their currency too much now that the FED has acted. At worst, they could normalize and just retrace the downside move and regain the pre FOMC equilibrium levels once again. Basically, we have, what can be called a FREE HIKE for these Central Banks that does not strengthen their respective currencies that place exporters at a potential price disadvantage, basically a status quo has been maintained.
Now it’s all about the timing as far as I am concerned. Has JEROME POWELL opened a hornet’s nest that is going to be difficult to control the timing attached to his comments moving forward?
Potentially, this is the case based upon the U.S. Unemployment data. Only the matter of a few weeks ago, the FED was adopting the view that until they have hard data they would not even be talking about, talking about TAPERING, and moving to market normalization. There has been NO hard data to support their views on unemployment, which as far as I can see has not been amended. Basically, the Fed looks to have been pressured by the markets and its own FOMC members who, frankly, just do not know when to keep their mouths shut.
Dot plots, potential interest rate rises in 2023... come on give me a break. This is NOT hard facts upon which to signify policy change. These are views which can change as often as the wind changes direction. Maybe it's as simple as the FED just got rattled and felt that they had to say something.
So, ARE ALL BETS OFF?
For now, maybe, but I am a believer in common sense. You may ask why do I trade in the FX market, of all markets, if I hold such beliefs? I have often asked myself that question...
I am in a strange predicament.
- Part of me, my right side of the brain (the arty side) thinks that the FED has let the cat out of the bag and now must act. If they thought that there was market pressure before. There certainly will be moving forward.The markets are like a dog with a bone.
- The other part of me, my left side of the brain (the analytical side) tells me this is pure nonsense and the moves in the DXY which has brought about huge USD strength has reacted poorly to last weeks FOMC statement.Everything I was taught in Economics tells me that the move by the FED should NOT be USD positive. It should be USD negative bearish for the USD.
I am just a simple trader, I must react to the hand given, but this will not stop me preparing for a reversal move which, could be wicked.
2. FOLLOW UP ON PREVIOUS TRADING IDEAS FROM RECENT DRIVE THRU BLOGS:
2.1: CURRENCY PAIR - USD/CAD:
TRADE DIRECTION: SHORT
DATE: 16th May 2021
BLOG REFERENCE: #412 FREE NEWSLETTER VERSION
Following the FOMC “Hawkish Surprise”, in fact, two days later when it became obvious that what I deemed to be an overreaction was going to remain in place for longer than I had thought, I covered my 5 trade multi-positional short trade for a total loss of 1,015 pips.
I am looking to re-short from higher levels.
2.2: CURRENCY PAIR – GBP/USD:
TRADE DIRECTION: LONG
DATE; 23rd May 2021
BLOG REFERENCE: #413 FREE NEWSLETTER VERSION
I have held onto this trade, and, in fact, I have added one further long trade “BUYING THE DIP”.
2.3: CURRENCY PAIR – EUR/NZD
TRADE DIRECTION: SHORT:
“DRIVE THRU” BLOG DATE 6th June 2021
BLOG REFERENCE: #415 FREE NEWSLETTER VERSION
I covered two open short trades for losses, after having some great success from earlier trades in that direction.
I have now entered long based off a wedge breakout inside a BULL channel following the FOMC. Over the summer I am still hopeful of playing this pair short based off Central Bank divergence but now that is NOT a viable trade.
2.4: CURRENCY PAIR – NZD/USD
TRADE DIRECTION: LONG:
“DRIVE THRU” BLOG DATE 13th June 2021
BLOG REFERENCE: #416 FREE NEWSLETTER VERSION
I am looking to BUY DIPS with this pair. I have already tried but failed on my first attempt for a loss of 30 pips. I was too ambitious or just not brave enough with me stop position, time will tell.
We may need to head a little lower first. I have already targeted lower levels of excellent previous areas of support and resistance confluence areas that should provide an excellent area from which to enter long.
3. THE WEEKLY FX PREMIUM - PERFORMANCE:
3.1: THE WEEKLY FX PREMIUM: MONTHLY PERFORMANCE:
3.2: THE WEEKLY FX PREMIUM: SUBSCRIPTION INFORMATION:
The WEEKLY FX PREMIUM is my subscriber-based FX support option, which offers, subscribers’ full access to my suggested trade set-ups and my market commentaries.
Further information about how to subscribe to the WEEKLY FX PREMIUM is also located at the top of my welcome page at https://www.weeklyfxdrivethru.com under the “SUBSCRIBE” tab.
4. CLOSING THOUGHTS:
Always remember longevity in Forex trading can only be achieved through trading with good RISK, TRADE and HEAD MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility. Trade with a TRADE PLAN, basically, plan your trades and Trade your Plan.
Mental toughness is key, and this is all about emotional control. Your mind can do amazing things, but only when it wants to, threat and alert will get your mind’s attention.
“Everyone has ability. It always comes down to mind games. Whoever is more mentally strong, wins” – Mohammed Ali.
Finally, be GRATEFUL for your wins and COUNT THEM. Keep a POSITIVE MINDSET in play at all times, regardless of the market conditions.
The Pip Accumulator
BLOG VERSION: #417 FREE NEWSLETTER
DATE: 20th June 2021