All the Central Banks in the World Can’t Hold Us Down – Weekly Analysis 19 – 25 September
Skerdian Meta • 6 min read
This was the week of the central banks. The BOJ (Bank of Japan), the FED and the RBNZ (Royal Bank of New Zealand) all held meetings this week. Besides them, the BOE (Bank of England) and ECB (European Central Bank) members also had their moment of fame, doing what they like best, parading themselves in front of projectors in the central bank catwalk.
It looked like they all had the same agenda, to disrupt the forex market and make a mess of the price action so that we forex traders wouldn´t be able to make it to the end of the week. But, we outsmarted them since we closed the week with a 121 pip profit (so take that central banks). But actually, it hasn´t been a smooth ride.
We had some difficulties during the middle of the week, but once the waters calmed we stormed back in and went for the kill. One particular long-term signal accounted for most of our gains but that´s the nature of this game. As George Soros would say, ‘It doesn´t matter how many times you lose, what matters is how much you make on your winners’.
So yes, the heavyweights of the central banks did what they had to do this week, which is nothing, but even so, the market was shaken up. At the end of the day/week, they left things as they were and the price in most forex majors closed the week around the opening levels. Read further below to understand all the twists and turns in the forex market this week.
You still don´t believe me when I tell you that a rate hike is coming?
As you have noticed, we started the week slowly (but profitably) nonetheless. The market was pretty quiet during the first 2-3 trading days because the BOJ and the FED meetings were due.
The forex traders were positioned for these meetings in the previous week, so there was no last minute (day) positioning. If you remember, we saw a lot of EUR and GBP selling last week, countered by USD buying, so the positioning was done last week. In case you don´t know what positioning means, it is the time before a major event in forex when the traders close their trades in anticipation.
So, it was quiet. Therefore, the number of our forex signals was low but we were making some consistent profit. We made 56 pips in those three days, but then the big mouths came out and everything started going haywire. We had some difficulties with our short-term forex signals, as is the case with such market conditions, but on the other hand, these large moves presented some good trading opportunities.
We opened a long-term forex signal in GBP/USD when this pair reached 1.3120 because I had (still have) this feeling that the Brexit sentiment is turning sour again after a sequence of positive economic data from the UK. On top of that, this forex pair was overbought on the H4 chart as you can see below, so we pulled the trigger and made more than 100 pips on that forex signal.
Had we kept it open, we´d have made another 100 pips, but that´s a bonus for whoever had the nerves to keep that trade open. So, the price action calmed down by the end of the week and we had a couple of short-term signals hitting take profit. By the end of the week, our total profit was 121 pips with a 66:33 win/loss ratio.
The market this week
Three of the main eight central banks had scheduled their meeting for this week, so the market expectations were high. The expectations from the BOJ and the Japanese government were for a triplet – which means more asset buying (monetary policy, QE), lower interest rates deeper into the negative territory, and perhaps more fiscal stimulus.
On Wednesday morning, the market was all tuned in for the BOJ and Kuroda. They had hyped the market expectations so much during the last 2-3 months that everyone was expecting fireworks. The thought that if the BOJ didn´t meet the expectations then the Yen would rocket.
The fireworks were actually overstated, but Kuroda was clever enough to deliver them in a way to confuse the market. They promised to take care of the Yield Curve which in theory is a way to control the bond market. Remember that the BOJ already owns half of the Japanese government bonds. It seemed like a fancy name to the market and indeed the JPY rallied at first, but soon the market came to its senses and USD/JPY threatened the 100 level once again without breaking it.
Later that day, the next part of the “Central Banks” series started with the FED headlining. We explained this in one of our market updates that the FED had only two choices, they could either hike the interest rates and issue a dovish statement or leave the rates unchanged and issue a hawkish statement.
As the rate hike odds (22%) implied, no one expected them to hike this time and they didn´t. The surprise was the overly hawkish statement and comments from Yellen in her press conference. The next rate hike has now been attached to the employment sector, which has been the strongest sector of the US economy and Yellen was the most hawkish I have ever seen her… so that´s as close to a done deal as it can get. The next FED meeting is a few days before the US elections, which is not a proper time to mess with the rates, and the December meeting will be a big event.
The last piece of US economic data before the FED meeting came from the building sector. The building permits and housing start-ups missed the expectations, which reinforced our view that the FED would stay put this time. Yellen said in the press conference that if the employment continues like this, then a rate hike would be probable. The unemployment claims came out below expectations, and that´s another reason to believe that the FED will hike the interest rates in December.
Apart from the BOJ which left the rates on hold as well, there was no other substantial economic data the entire week until Friday. On Friday, the Japanese and the Eurozone manufacturing sectors showed an improvement, while the inflation and the retail sales in Canada declined. The Canadian Dollar suffered some losses on the back of this, besides the consensus fallout between the oil producing countries.
The BOJ meeting is over now, so let´s see where this left the USD/JPY. This forex pair jumped 100 pips higher among confusion after the BOJ statement – but that didn´t last long. The market quickly realized that the spoon was empty and all the bulls packed up their bags and left the bears in charge. USD/JPY started to fall shortly after and the decline stretched about 300 pips, reaching 101.10. But, once again this support level held its ground and this pair closed near the 101 level. On the daily forex chart, we see that the 50 moving average in yellow provided resistance during the move higher. So, that´s the first decent resistance if the price is to climb up, but the picture still seems quite bearish and now the 100 level seems more vulnerable than before the BOJ.
The 100 support level stopped the decline again
The downtrend continues in this pair
Last week, we spotted the upside-down pin in the GBP/USD forex chart from the previous week. That´s a bearish indicator and last week this forex pair lost about 300 pips, but the 1.30 support level still didn´t let go. This week, the price made a 100 pips run higher after the FED left the rates unchanged – but the move seemed weak. As soon as the sentiment turned around, this pair resumed its downtrend and on Friday it broke below the 1.30 level, which is supposed to be resistance now. On the monthly chart, the picture looks quite bearish as well. The last two monthly candles closed as a hammer, which is supposed to be a bullish signal, but after failing to reach 1.35 earlier in September, this monthly candle is forming an upside-down candlestick which is the opposite of a normal hammer candlestick. That means that the downside is at risk. If the price doesn´t move above 1.30 soon, then it´s likely we´ll touch the 1.28 low that we saw after the Brexit referendum.
Two weeks ago, the pin candlestick was a valid bearish signal
The two monthly hammers couldn´t reverse the downtrend
Week in Conclusion
The forex market was expecting a lot from the central banks this week, but not much changed. The RBNZ was totally neutral, the FED left the rates unchanged and the BOJ pretended to act out, but in the end, they didn´t make any substantial actions.
The FED left the rates unchanged so no surprises there either, but at least they made a strong case for a December rate hike. Here at FXML, we closed yet another week in profit. Next week, the central bankers will be off the leash again. The heads of almost all central banks have speeches scheduled, but I´m pretty positive that we will survive another week of them, so see you guys on Sunday evening.