Four Key Interest Rate Decisions Plus NFP Numbers – Be prepared for an Explosive Week in the FX Market
Eric Furstenberg • 6 min read
If you’ve been trading the FX market lately, you will know that it’s been difficult to hit those home runs consistently. Of the major currency pairs, many have been chopping around in ranges for months already. The AUD/USD, for example, is currently trading at the same rate as 80 weeks ago. The EUR/USD is at the same level that it was 86 weeks ago. What the FX market needs at the moment, is the combination of two ingredients – direction, and force. Many of the recent moves in the currency market have lacked these characteristics.
We have four interest rate decisions this week. The first one is out of Australia on Tuesday at 03:30 GMT. The RBA (Reserve Bank of Australia) are expected to keep rates the same at 1.5 percent. The Aussie has done a rather decent job of standing its ground against the sturdy US dollar lately. The US dollar has been performing well against most of the other major currencies, and although the AUD/USD has been struggling at resistance these last few days, there is still some underlying strength to be found in the Australian dollar. Would I buy the AUD/USD now? Definitely not. The US dollar is not the right currency to sell at the moment, and the technicals suggest a further decline in the AUD/USD exchange rate over the next few weeks. Let’s look at a few charts:
AUD/USD Weekly Chart
As I mentioned in an article last week, what appeals to me about this chart, are the many candle wicks to the upside. This tells us that at the moment there are sellers parked at these levels who have found good value in selling it there.
As the largest buyer of Australia's commodities, China is having some problems with its heavy debt load. The slowing down of the global economy has also taken its toll on this economy, and the Australian dollar has also felt this pain directly. Now if there arose an even greater problem out of China in terms of debt defaults and an even slower economy, the Australian dollar could suffer large losses due to the extra pressure on the Australian economy. Remember that Australia exports a lot of commodities to China, and a lack of demand for these raw materials would necessarily put pressure on the Australian dollar.
The Australian interest rate decision by the RBA (Reserve Bank of Australia) on Tuesday could perhaps be a great market mover if we got a rate cut, for example. Of course, the odds of a rate cut are small, but we need to be prepared for anything. If the RBA delivered a cut on Tuesday, the AUD/USD would necessarily take a beating. If they keep rates on hold as expected, there could be a mixed reaction to it, and the rate statement would probably hold the greater market moving power in that case.
The AUD/USD has been moving very much sideways in the last 58 trading days, and it would be great to see it break out of this consolidation sometime soon. Let’s look at a daily chart of the pair:
AUD/USD Daily Chart
Here we can see that the pair has spent considerable time in this triangle / wedge formation already. We are fast approaching the apex of the triangle, and I expect the pair to break out of it soon. You will also notice on this chart, that the current market price is above the 200-day moving average which tells us we should be careful to short this pair right away. One thing we can’t ignore is the tremendous dollar strength we’ve seen over the last few weeks. Although the AUD/USD is technically considered to be in an uptrend (because it is trading above its 200-day moving average), I am not interested in buying this pair at the moment. If the US dollar rally continues to gather pace over the near-term, the AUD/USD could soon break out lower from the current consolidation in which it finds itself.
If you’re trading the Aussie this week, you need to keep an eye on the FED interest rate decision on Wednesday at 16:00 GMT, as well as the Australian retail sales numbers on Friday at 00:30 GMT.
The pound is a very important currency to watch this week. Concerns about the UK’s economic outlook have intensified over the last few days, and the British pound’s role as a global reserve currency could be in danger, as a continued decline in the pound’s value and other economic factors could strip it of this functionality.
The weaker pound could certainly aid UK exporters, and increased exports from the UK would help to close a large current account deficit. On the other hand, the European Council president Mr. Donald Tusk said that the EU (European Union) policy makers would not be keen to accommodate the UK. We know that the EU is a very important recipient of UK exports. About 44% of the UK’s goods and services exports in 2015 went to other countries in the EU.
Let’s look at a daily chart of Cable:
GBP/USD Daily Chart
Here you can see that the GBP/USD has been trading in a narrow range again for a couple of days. I say again, because right after the Brexit vote in June, the pair traded in a range for 71 trading days before it resumed its downtrend on the 4th of October. This little range in which the pair is caught up at the moment looks like it could be a bear flag pattern which could break out lower soon. With all the heavy catalysts this week, this little range could soon be history.
This week’s BOE (Bank of England) interest rate decision and the MPC meeting minutes (both at 12:00 GMT on Thursday) could be two great market moving events. There is a lot of tension in the air surrounding the whole Brexit theme and all the risks associated with it. When this type of tension and uncertainty drive investors, it often leads to big moves in the currency market. Perhaps we will encounter some splendid opportunities to take advantage of on the GBP/USD. I would like to see the pair break out of this consolidation phase first before I side with a particular bias. When we look at the long-term trend on a daily or weekly chart, the pair is clearly in a solid downtrend. Under normal conditions, we should only be trading on the short side then, but of course, we should be cautious of getting caught out if a sudden bounce occurs in the pair and we’ve prematurely engaged in short positions. If we enter short, using confirmation that the pair is actually resuming lower, our chances of realizing a profit will increase.
This pair will also face some hefty event risk this week. The BOJ (Bank of Japan) also have an interest rate decision and an accompanying press conference by the BOJ governor. It is not clear how late the rate decision is, but the press conference will be at 06:30 GMT. There will also be a monetary policy statement that will be released with the interest rate announcement.
I suspect we could get a lot of market movement from this BOJ meeting. The press conference will probably be the main catalyst, with the monetary policy also bearing a lot of weight.
My short-term outlook for the USD/JPY is bullish, and perhaps we could see some more upside this week. If the FED maintain their upbeat tone about the US economy, and the NFP (Nonfarm payroll) numbers impress on Friday, the pair could rip much higher. Let’s look at a daily chart of the pair:
USD/JPY Daily Chart
This last bullish wave has been quite impressive. The big psychological 100.00 number has been an incredibly solid support level, and the fresh ‘higher swing high’ that’s recently been formed has changed the bearish structure of the pair to 'cautiously bullish'.
I like the idea of buying dips on this pair. The only problem I have about buying this pair at the moment is that the recent bounce might be somewhat exhausted. We know that the FX market has the potential to move in one direction for extended periods of time, but it is normally safer to enter new positions on weak retracements. Here are a few examples on a 4-hour chart:
USD/JPY 4-Hour Chart
I don’t expect a lot of fireworks at the FOMC statement and the FED interest rate decision on Wednesday at 16:00, although great volatility can’t be ruled out. There is a lot of tension in the air because of the looming elections in the US, and we know that uncertainty sometimes causes irrational, erratic price action.
Tomorrow we have European CPI numbers at 10:00 GMT. I don’t expect a great market reaction here, as market players will focus on the more important events later in the week.
Have a great trading week!