Mixed readings on inflation this morning but mostly dovish ECB minutes which hinted that the ECB was thinking of NOT raising rates at the July rate decision.
You can imagine how that in and of itself straight away lowers the likelihood that they hike in September.
If they considered NOT hiking rates in July and now since then the data in Europe has been softer… why would they hike in September?
So that thought process lowers the chances of another rate hike.
And so the EURGBP trade started as a bearish GBP view but now both the EUR and the GBP are fundamentally bearish so the pair will likely just chop around in a range below 0.86.
And that’s why having good sources to understand the fundamental context matters.
Decent Dollar strength was triggered by the FOMC yesterday.
Why?
Because yes they kept rates on hold, but decided to lower their projections for the number of rate cuts next year, while also keeping the door open for another rate hike in November if necessary.
Here’s Bloomberg yesterday:
And a bit more today:
Hawkish.
So with this in mind…
The fundamental context suggests a bit more Dollar strength ahead.
Good.
At the same time, on the technical side across most Dollar pairs like we can see some noticeable bearish price action with a BIG bearish engulfing on EURUSD and a BIG bearish pin bar on AUDUSD.
Both triggered by the FOMC so it gives the price action even more meaning because there is a real fundamental shift in sentiment creating the candle.
That’s meaningful.
Anyway…
That technical price action is also supportive for a bit more Dollar strength.
So now we have both fundamentals and technicals aligned in one direction.
And that’s the kind of trades that we love taking.
Now let’s make it practical…
Here’s an AUDUSD chart with an actionable trade plan:
When you understand the fundamental context behind the higher timeframe price action that’s where you understand things better by the way.
There’s price action, and there’s price action backed by fundamentals.
There’s a difference there.
So, when you see a pin bar, engulfing candles, or anything else.
The question to ask is…
What caused that?
If it’s just random then it might be just commercial flows, rebalancings, or other kinds of activities that are irrelevant to the overall sentiment and direction.
Almost false signals, so to speak.
But when there’s a noticeable price action formation that is backed by a fundamental event that FORMED that specific candlestick behavior, that’s when you know you are looking at an important candle.
And that’s where you know you can give more attention than usual.
Anyway…
I know there are a lot of technical and price action enthusiasts here so I thought this might be useful to share.
In simple…
Make sense of the price action with the fundamental context where you can.
Why did such and such bullish or bearish price action form?
The answer to that question gives you higher quality price action to follow and helps you filter out a lot of the false technical signals that misdirect you into the wrong trades.
The fundamental sentiment for the Dollar might be near a turn.
Why?
Because the inflation measures from Friday support a more dovish FED going forward.
Here’s Bloomberg on the matter:
Don’t get me wrong…
That’s NOT necessarily a reason for the Dollar to dump from here.
No.
But it removes a reason for the Dollar to strengthen further.
And since the market is well loaded up on Dollar longs some of those positions might start to take profit causing a noticeable Dollar pullback.
Makes sense?
Awesome.
Anyway…
So far there’s nothing solid enough across the board from a technical point of view to put a trade on with USD shorts, but I will be keeping an eye on it…
If I see a setup to take action on or if the fundamental context changes, I will update again.
For now just keep in mind that the medium term context for the Dollar right now is slowly pivoting to a more bearish or just neutral sentiment.
Squared the NZDUSD longs in small profit ahead of the NFP.
There is a decent risk that the data today for the US prints better than consensus, so adjusting for that.
Plan was to have the trade at breakeven before the release but price is still too close to the entry point so just taking profit now and then will evaluate whether to jump long again right after the release or not, depending on the data itself.
So we have the fundamental context slightly back in favor of some Dollar strength as the recent inflation print is supportive of the idea of higher for longer in regards to US interest rates.
And at the same time now we have technical signals suggesting the same path with EURUSD which failed the break of the highs above 1.06 and printed a bearish engulfing on the daily chart.
EURUSD in particular is holding up better than anticipated but the Dollar overall across the board is doing pretty well, especially against commodity currencies.
Anyway, still looking for 1.0440 overall on EURUSD, but keep in mind…
The stop loss is already at breakeven on the USD longs.
Powell speaks later today.
He shouldn’t change much of the context but manage the trades anyway.
Nothing with the ECB or the latest US data itself to change the context but rather the price action across the board looks and feels like it wants to squeeze some late Dollar bulls.
So just adjusting to that.
Will update when anything new of interest shows up.
