CORE POSITION TRADE
TRADE REFERENCE CP30:
DATE: 21st April 2022
PROJECTED TRADE PERIOD: 2022 - 2023
CURRENCY PAIR: EUR/USD
TRADE DIRECTION: LONG
5 MINUTE ZOOM UPDATE: CP30eurusd01052022
THOUGHTS BEHIND THE TRADE:
In 2020 the Covid-19 pandemic severely weakened both the US and EU economies, which to be honest were already felling stress from years prior. To some extent one could state that Covid-19 gave both Central Banks to opportunity to reset.
Instead, both Central Banks with lack of imagination reverted to type and basically cut rates to zero or close to and flooded the economic markets with cheap money adding unprecedented liquidity via asset purchases (Quantitative Easing).
The US, in typical American style implemented an extreme policy of what was known as helicopter money sending cheques from the government to compensate the population in an incredible effort to combat the Covid-19 shock to business and employment.
The FED, after a long, long period of extreme dovishness, finally started TAPERING in late 2021. This completed in Q1 2022 and now we have an unprecedented situation of faster rate hikes than ever predicted and Quantitative Tightening (QT) to boot.
Look, there are wild claims of 4 x 0.50% rate hikes back-to-back from Citi, announced today (21.04.2022). I have real doubts whether the FED, in fact any Central Bank could ever meet the expectations of the markets BUT, we are in strange times and without doubt the move is for interest rates to move higher.
The FED’s path will be interesting to observe, as it will be very difficult to tighten substantially with the current level of government debt.
Looking at the ECB...
The ECB wants to turn HAWKISH and raise rates but the economic implications of 19 countries sharing one cheque-book weighs heavy on Christine Lagarde, ECB President.
CENTRAL BANK divergence has been a big influence on my trades 2021-2022 and in 2021 this divergence between the FED and ECB, BUT, this RISK is going to shift.
Bear in mind that huge deficits and ballooning debt are a long-term negative for the USD. However, it remains the safe haven currency to hold. This DOES make anyone a little nervous being short USD.
Inflation in the US and EZ are rising at an alarming pace with no sign of an end as of todays date (21.04.2022).
The ECB has a single mandate of “Price Stability”, and one must expect that they will be forced to act and change away from being DOVISH to becoming HAWKISH and a move higher away from the recent 1.070 lows could be on the cards.
As you can see from the chart below, we are still moving inside a BEAR CHANNEL, so this trade set up is currently contrarian based. It will NOT be until price is above 1.1300 that we can say with any real conviction that the downward pressure on this pair has been removed. That is currently about c.400 pips away from current pricing.
I am early into this trade. Picking a bottom is difficult in this downtrend. Once we get moving higher the Technicals will drive this pair higher BUT we must remain conscious the over-hanging fundamentals vis-à-vis the FED and ECB could create a bloodbath.
Therefore, there are potentially severe RISKS over and above the usual involved with this trade.
EXISTING LIVE and LIMIT ORDERS: