The Real Fundamental Analysis

[BeSomebodyFX]

Quick macro update guys.

Currently there are very few alternatives to the Dollar.

Basically…

There’s a clear policy divergence building up in favor of the Dollar.

Right now it’s particularly evident on EURUSD as the ECB has made it official that they will start cutting rates in June, so diverging from the FED…

Diverging from the FED?

Yes, inflation is stickier in the US than it is anywhere else, and that will lead the FED to keep rates higher for longer than other central banks:

So…

Lower rates elsewhere besides the US makes yield differential move in favor of the Dollar, allowing the USD to appreciate.

That’s the simple way to put it.

But more than that you can also add the shaky geopolitical context:

What that has to do with the USD?

It raises demand for safe havens, and that includes the Dollar.

@BeSomebodyFX

If something goes wrong geopolitically across the world, all paths there would lead to demand for?

Safe havens.

Same reason as the growth scenario…

Safety. When things get risky, people run to CHF, JPY, and USD.

And GOLD too, of course.

In other words…

Very few alternatives to the Dollar in this context guys.

Right now the US economy is solid.

US inflation is sticky.

@BeSomebodyFX

Simply the US economy keeps printing strong, and inflation picks up a little or stalls ABOVE the FED’s target.

That’s… bullish for the Dollar.

And the geopolitical context is shaky.

@BeSomebodyFX

If something goes wrong geopolitically across the world, all paths there would lead to demand for?

Safe havens.

And US elections are getting closer.

@BeSomebodyFX

Yes that’s right.

It’s an election year.

And Trump is leading the polls.

As the election gets closer the market will start to price in his victory if he keeps leading, and that’s… you guessed it, bullish for the Dollar.

With all that said.

We are targeting EURUSD near 1.00 long term.

With 1.04 the first step.

[BeSomebodyFX]

By the way, still have something going on in EURGBP.

The fundamental context is A LOT more mixed now with nothing bullish about the EUR.

So the size of the trade has been reduced quite a bit BUT now looking to add again as the technical aspect looks interesting with a big bullish engulfing forming on the daily chart right after price took out an important low.

And that despite the hawkish UK CPI this morning, which sort of suggests the markets wants the GBP lower, a lot.

Target still near 0.86200.

[BeSomebodyFX]

@BeSomebodyFX

Nearing target on EURGBP already.

Keep in mind, this has potential to run much higher than 0.8620.

Potentially 0.8680.

So we have trailed stop loss in profit and now we let this run.

By the way…

What was the trigger that started the GBP weakness on Friday?

This:

Dovish BoE comments.

[BeSomebodyFX]

@BeSomebodyFX

@BeSomebodyFX

Keep in mind, this has potential to run much higher than 0.8620.

Took profit on the shorter term position.

Now keeping some longer term ones for 0.8680.

[BeSomebodyFX]

Ok guys.

New trade setting up and it’s on EURUSD shorts which lines up with the longer term context…

@BeSomebodyFX

We are targeting EURUSD near 1.00 long term.

So…

Shortter term expecting a hawkish FOMC tomorrow given how inflation has been behaving in the US.

While on top of that…

Technically bearish engulfing forming on the daily chart right at higher timeframe resistance.

And lower timeframe break in market structure with the trendline breached.

Here’s the chart:

You know how it works…

Fundamental direction and technical setup aligned.

So that’s a trade for us.

Target 1.0520.

[BeSomebodyFX]

@BeSomebodyFX

Not the ideal FOMC yesterday.

Powell wasn’t as hawkish as he could have been.

So that mixed sentiments up a bit in the short term

I’ve squared the EURUSD shorts about halfway to the stop loss.

That’s ONLY the short term position tho.

Longer term the context hasn’t changed…

@BeSomebodyFX

We are targeting EURUSD near 1.00 long term.

With 1.04 the first step.

Still that.

[BeSomebodyFX]

Alright guys, time for some educational content.

Since it’s US CPI next week I thought it would be a good fit to talk about economic data.

Meaning…

How to know what to look at, how to look at it, and so on.

The point being that you DON’T have to look at every single piece of data out there to know the fundamental context.

Actually, it’s quite the contrary.

But let me show you…

Basically the rule of thumb is this:

If it matters for the central bank, it matters for markets.

Meaning that if the economic number is one the central bank is watching then it’s something that’s going to shape markets’ expectations for what the central bank will do next.

And you know…

That sets trends and moves markets.

Ok.

Question…

How do you know what matters for the central bank?

Well, it’s slightly more straightforward than what you may think.

They tell you.

Yes.

The central bank itself tells you the exact metrics they are looking at to decide their moves.

For instance…

Just as an example, here’s a small snippet of the transcript from the November 2023 FOMC meeting:

Quite straightforward…

What’s Powell telling there?

They want to know what inflation is doing.

So…

What are you going to look at to know what the FED does next?

Building permits? Exports data?

You get the point.

You look at inflation.

That’s the metric that will move the needle for the central bank to decide what to do next.

Makes sense?

Perfect.

Now, why is this important?

Because those exact metrics that the central bank looks at are exactly the economic numbers that REALLY start trends and move markets for weeks after its release.

For instance…

And…

See, understanding that distinction between the “data that matters” and the rest is quite an important element to read fundamentals the right way.

I mean, if the FED is purely focused on inflation and you are trying to short the Dollar after some weak export data, like… what are you doing?

Again…

The numbers that matter for the FED are the ones that trigger trends because they shape sentiments heading into the interest rate decision thereafter.

The rest just create volatility.

Meaning that the short term moves out of the data that doesn’t matter is likely to run out of steam as the market pivots back to the main story.

So learn to differentiate between those if you want to have a good read on fundamentals.

Because you HAVE to filter down to the exact economic indicators that matter to the central bank to get solid trades.

And that’s where the upcoming CPI comes into play.

Here’s Powell on May 1 at the latest FOMC meeting:

Inflation is still of course the FED’s focus.

So any deviation in that number will set the next trend for the Dollar.

Higher than expected and the USD will start to run quite a bit with EURUSD likely to get to 1.05 by late next week.

If instead… CPI prints below expectations than the Dollar will start trading a lot softer with EURUSD likely to get to 1.09 at least before the weekly close.

Will update if there’s anything interesting to trade around it.

[BeSomebodyFX]

So.

Inflation in the US wasn’t that bad, at all.

Now, is this the type of data that sets trends?

Yes.

Why?

Because…

@BeSomebodyFX

If it matters for the central bank, it matters for markets.

Meaning that if the economic number is one the central bank is watching then it’s something that’s going to shape markets’ expectations for what the central bank will do next.

@BeSomebodyFX

Here’s Powell on May 1 at the latest FOMC meeting:

Inflation is still of course the FED’s focus.

So any deviation in that number will set the next trend for the Dollar.

So look for some more Dollar weakness ahead.

Is it a certainty?

Do I even have to reply to that?

Of course not.

But it’s the…

Path of least resistance given the fundamental context.

That’s all you need to know on the Dollar right now.

[BeSomebodyFX]

Long NZDCAD setting up.

Softish CPI from Canada yesterday.

And hawkish RBNZ meeting overnight.

So the BoC will start cutting rates in June, and the RBNZ is not even close to that.

Small policy divergence there that should keep NZDCAD in an overall uptrend.

Here’s the chart:

Daily chart also trying to build a bullish engulfing…

Tho NOT fully printed yet, but it seems to be the path anyway.

Target 0.85.

Will update along the way.

[BeSomebodyFX]

NZDCAD still going and trend intact.

But I’ve have reduced the trade size by half taking some small profits.

Much needed catalyst to get this really going is the BoC next week.

Will update.

[BeSomebodyFX]

First part of the move done on NZDCAD.

Now it’s up to the BoC rate decision on Wednesday.

Stop loss anyway at breakeven.

And will post a few more details soon on the BoC rate decision and why a rate cut is the most likely scenario.

[BeSomebodyFX]

So, the key event this week for the NZDCAD trade is the BoC rate decision on Wednesday.

@BeSomebodyFX

So the BoC will start cutting rates in June, and the RBNZ is not even close to that.

There is a strong case for the BoC to cut rates already.

Why?

Ok.

You are a central bank.

Your inflation target is a band between 1% and 3%.

So the closer inflation is to 2% the better but you don’t necessarily need to wait for inflation to be exactly at 2% to start cutting.

You care most about the projected direction.

With that in mind…

The latest inflation readings in your country show a 2.7% read, down from 3.1% previous.

Not too bad.

It’s some progress there, and it’s already within your official targeted band which is between 1% and 3%.

Looks like in a couple more prints it could be at that 2% target already.

Cool.

At the same time, the overall economy is slowing down MUCH faster than you expect.

And I mean, quite a bit faster…

You expect GDP at 2.8% and it prints 1.7%?

Seriously, there might have been some miscalculations there.

The economy is slowing A LOT faster.

Inflation is being dragged down.

And all that looks set to continue.

Now…

You meet to decide if you can cut rates already or not.

What do you do?

You cut.

A small 25bps cut.

But you cut.

And that’s what the BoC should do on Wednesday.

And that creates creates a policy divergence between the BoC and a few other central banks that are instead NOT looking to cut rates anytime soon.

@BeSomebodyFX

So the BoC will start cutting rates in June, and the RBNZ is not even close to that.

Small policy divergence there that should keep NZDCAD in an overall uptrend.

Yes, the RBNZ is one of them.

[BeSomebodyFX]

Alright guys, BoC rate decision today.

Keep in mind…

A rate cut has now been almost fully front run with the CAD weakness we have seen since the start of the week.

So we shouldn’t expect much from the actual announcement.

Could be good enough for 20 to 30 pips of more upside on NZDCAD but after that it can get tricky.

So…

Trailed the stop loss well in profit and also ready to take profit right after the BoC.

[BeSomebodyFX]

Trade done.

@BeSomebodyFX

2024-05-22_09h02_521918×1036 48.6 KB

25bps cut from the BoC.

@BeSomebodyFX

ready to take profit right after the BoC

And so now taking profit on the NZDCAD longs.

[BeSomebodyFX]

Long NZDCAD again.

Really soft CPI from the US, and…

That feeds into expectations for more disinflation in Canada too.

So?

So the monetary policy divergence sentiment between New Zealand and Canada lights up again.

You know…

RBNZ not looking to cut anytime soon while instead BoC already started cutting rates?

@BeSomebodyFX

Small policy divergence there that should keep NZDCAD in an overall uptrend.

That one.

With the context set, here’s the technical chart…

Alright.

Target 0.8630.

[BeSomebodyFX]

Stopped out on NZDCAD.

Wrong entry timing.

Caught in the fakeout of the highs.

[BeSomebodyFX]

Alright guys.

First US presidential debate tonight.

So it’s time for an indepth brief on it.

Ok.

First of all…

There’s one core element that decides how markets will behave towards the Election.

What’s that’?

Tariffs.

Yes.

Trump is there ready to pull the tariff lever against China, Mexico, and to some extent Europe too.

@BeSomebodyFX

Does that really matter for markets?

Oh, of course.

Here’s USDCNH and EURUSD right after Trump got into office in 2016.

And here’s instead the same two after Biden got into office in 2020.

See what’s going on there?

That’s based on foreign trade policies.

Trump is A LOT more aggressive, Biden is a lot easier.

And that will make the whole difference in how the market will move towards the Election.

But on hold a second…

The US election is like 6 months away?

True.

But markets move on expectations…

And so tonight’s debate could already start pricing in some scenarios well ahead of the election.

So…

What scenarios exactly?

Goldmans recently came out with a very handy table showing the overall expected impact of the various scenarios.

Here:

Above you can see a table that shows the “baseline” potential scenarios from the election.

You can see the impact is pretty straightforward…

Both in a Republican sweep and in a Trump win with a divided government it’s the immediate impact will be large appreciation in the US Dollar across the board.

With pretty much no exceptions.

While Biden with a divided government or a whole Democratic sweep would be much quiter and to a degree also negative for the Dollar.

That’s all you need to know.

I went into a bit more details on this post here.

So that’s a good read if you want more details.

But put simply…

Whichever comes out ahead of that debate will decide how the market moves.

Trump bullish USD.

Biden bearish USD.

That’s the story.

[BeSomebodyFX]

Long S&P500.

Not a lot to mention on this other than just overall macro context supportive for risk assets, and…

Seasonals turning VERY bullish from today up to late July.

Here’s the full seasonal chart:

And here’s the indepth seasonal analysis year by year:

Notice the consistency.

Every year from June 27 to July 24 the S&P500 is on average around 4% higher.

Which would put the S&P500 above 5700, so…

Target 5700.

In simple…

Seasonals, fundamentals, and technicals are pointing to one thing.

S&P500 to 5700 by mid July, not much else to add to that.

[pipsmaster10]

Your selfless contributions to the community are truly appreciated. Your dedication is a blessing to us all

[BeSomebodyFX]

@pipsmaster10

Your selfless contributions to the community are truly appreciated.

Thank you for sharing that…

Honestly there’s hasn’t been much engagement here, at least not as much as I thought.

The conversations would be MUCH more useful and educational if readers engage more by asking questions or adding their thoughts.

But either way…

I know there are plenty of silent readers who don’t engage but still find value in the content here.

So I’m happy to keep posting

Thank you.