Will the Fed Hike Rates on Wednesday?

The Fed is due to announce its monetary policy on Wednesday. Although there was no official commitment to a rate hike in December Fed members have hinted a rate hike take place. As we have already seen, a rate hike may not necessarily strengthen the US Dollar (USD) as the accompanying statement often provides the tone in the Foreign Exchange (Forex) market. EURUSD was heavily sold on false expectations for tapering the QE towards the end of last week. From a technical angle Euro Dollar trend is unclear as the monthly chart may easily evolve into a bearish flag that may signal further selling in the first quarter of 2017. Our preliminary expectations are for the Fed to hike rates but the accompanying statement and the press conference may limit the weakness. We may witness a short-lived spike (strong USD, possibly between 100 – 200 pips before the strength reverses, We highlight this is our preliminary analysis, we may have greater clarity as we near Wednesday.

 EURAUD Weekly Chart

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GBPAUD Daily Chart

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We have been monitoring Euro Aussie for several weeks. The cross has been locked in +400 pips range (approx.) since October. If the cross is able to overcome the resistance at 1.4500 we may note further gains in the cross. A gap lower will enhance the risk ratio of the trade. 1.4030 is the latter support, which is why the protective stop will be layered below. The initial gains we are anticipating are unlikely to be related to the Fed, economic data from Australia and China may provide the initial trigger. A gap higher at the opening may toughen the entry but we will have to wait for the market to open and assess how we wish to proceed. GBPAUD provides a similar entry, we are uncertain however if we wish to opt for both trades. The key price levels are marked on the chart.

Aside the Fed we are noting early indications for a strong GBP against a basket of currencies aside the Aussie including GBPNZD, GBPCAD and GBPUSD. If we opt for GBP we will be targeting the CPI that is due on Monday and may not be related to the Fed. We will outline the technical analysis for GBPCAD, if a cleaner entry is noted in other GBP pairs and crosses we will update this page.

GBPCAD Daily Chart

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Although it may appear as reversed Head-And-Shoulders (H&S) at first glance, it is merely a strong support level. If the price is able to extend its gain above the initial resistance (upper blue line) it may pave the way for stronger gains towards 1.7530. It is possible the Bank of England (BOE) may be the main trigger for the rally aside the CPI.

We are likely to update this page as we near the Fed’s monetary policy. As we are anticipating a short-lived spike it may be capitalized via an entry order, however, it is too early to layer the entry order. The signals will be issued after the market opens (after 22:00 GMT).

EURAUD Trading Signal

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EURAUD long at market price (1.4161)
Take profit: 1.4900
Protective stop: 1.3980
Risk Ratio (RR): 1 : 4 (approx.)
Estimated duration: 21 days

GBPCAD Trading Signal

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We decided to opt for GBPCAD despite OPEC production agreement.

GBPCAD long at market price (1.6556)
Take profit: 1.7040
Protective stop: 1.6380
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 21 days

12/12/16 UPDATE: GBPCAD is trading at 1.6665 at the time of this writing.

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We are closing 20% of the long trade at market price. We currently lack a sufficient distance to shift the stop to the entry as we used the weekly chart. We will determine around the daily close whether the stop cam be shifted to the entry and whether we may increase our exposure to GBP.

12/12/16 UPDATE: EURAUD is trading at 1.4188 at the time of this writing.

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We are closing 10% of the long trade at market price. This is a risk management maneuver.

GBPNZD Trading Signal

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We are taking a risk in GBPNZD. The entry is based on the weekly chart but we will display the 30min chart as we are implementing an intraday stop. Doing so involves a limited risk.

GBPNZD long at market price (1.7628)
Take profit: 1.7890
Protective stop: 1.7508
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 3 days

13/12/16 UPDATE: GBPNZD posted a false break on the intraday chart. We were anticipating a break above 1.7647, the leg lower triggered stops that attempted to capitalize over the intraday breakout. Had this been an intraday entry without the support of the weekly chart we would have exited the trade.

 

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As the entry is supported via the weekly chart we closing 20% of the long trade at market price (1.7603). The weakness may extend to 1.7530 as the intraday support gave way, we are uncertain this is a false breakout, which is the partial closure.

13/12/16 UPDATE II: Due to market activity that was noted prior to the London fix GBP was unable to cling on to its gains. We were anticipating to have a greater distance from the market by Wednesday, which is not the case at the time of this writing.

We are averting to the 4hr chart. We have noted a potential reversed Head-And-Shoulders (H&S) on the 4hr chart. We assume economic data that is due during the European session may be the trigger. We are modifying the take profit to 1.6730 and shift the protective stop to the entry. In addition, we are closing 10% of the long trade at market price (1.6621).

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After the daily close we may shift the stop above the entry once the spread stabilizes. This must be done to ensure our market exposure is contained (the stop was later shifted to 1.6570).

13/12/16 UPDATE III: EURAUD was also in a fair profit but was unable to sustain its gains. We are displeased with the range of the cross on the 4hr chart but as this is a weekly entry we are allowing the trade to float. EURAUD is trading near out entry at the time of this writing. Similar to EURAUD, GBPNZD was also in a fair profit before correcting lower. We liquidated 20% of GBPNZD at 1.7803 as the intraday breakout provided us with an early indication further selling may take place towards 1.7530. We are uncertain whether the bearish spike that was noted prior to the London fix is sufficient to satisfy the objective of the intraday breakout. We are relatively close to the market as it is a volatile cross but we are not modifying the stop or the take profit order. The 20% partial we realized earlier is sufficient at the time of this writing.

At the beginning of the week we were planning to layer an entry order prior to the Fed monetary policy, which will be done tomorrow unless a significant price movement takes place. We are currently observing USDJPY.

14/12/16 UPDATE: 1.7530 gave way, which lead to further weakness, triggering the protective stop loss order. The support initially lead to a rebound towards 1.7588 but the gains were unsustainable. GBPCAD protective stop was triggered following recent GBP weakness. The stop was shifted above the entry. EURAUD is the only trade we are holding at the time of this writing. The recent GBP weakness was triggered by EURGBP. It appears large short orders were placed at 0.8420. The market attempted to kick those orders into play, which lead to GBP selling. We are not re-entering trades that were stopped out, our entry order or orders for the Fed monetary policy will be issued after the London close.

Fed Monetary Policy Entry Order

The Fed is widely expected to hike rates in its monetary policy meeting. The trigger for market reaction is not the rate hike itself but the dots. There are currently 2 rate hikes expected for 2017. If the Fed increases from 2 to 3 hikes in 2017 we may witness a stronger USD buying in the market. If the dots remain unchanged it may create whipsaw reaction in the Forex market. The brexit negotiations are expected to begin in 2017, which is a sufficient reason to remain cautious. We are anticipating a rate hike to take place, which may initially lift USD against a basket of currencies and then reverse following the dots. A rate hike on its own may also weaken the US indices as it marks the resumption of the monetary tightening. Although the correlations have deviated in recent months, once the indices correct lower the commodity currencies (AUD, NZD and CAD) may be dragged lower. We initially considered a sell limit order in USDJPY, however, due to the weakness of the currency pair in today’s session we find it difficult to believe the entry price will be triggered today. We would rather avoid CHF as the Swiss National Bank (SNB) could contain any CHF strength. This left us with NZDJPY.

NZDJPY Weekly Chart

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We suspect the Fed’s monetary policy may trigger a re-test of the initial resistance (in blue). As this is a weekly chart and it is prior to the weekly close the spike may extend towards 84.60 before reversing lower. We decided to layer the sell limit order at 84.05.

NZDJPY Entry Order (Sell Limit) at 84.05
Take profit: 82.15
Protective stop: 84.73
Risk Ratio (RR): 1 : 3 (approx,)
Estimated duration: within 40 minutes once triggered

This is a relatively tight stop as we wish to limit the risk. Although NZDJPY is not as volatile as other JPY crosses once the resistance at 83.36 gives way stops will be triggered on the break which should lift the price to the 84.00 region. We would prefer if the entry order is filled prior to the press conference. We will issue an update after the statement is released.

14/12/16 UPDATE II: EURAUD is trading at 1.4227 at the time of this writing. The gains were insufficient to break outside the range we mentioned yesterday. Although it is a weekly entry we are concerned EURAUD may retrace lower due to its failure to break outside the range. This maneuver is not required by the book but we wish to limit our exposure.

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We are closing 30% of the long trade at market price and shift the protective stop to the entry.

15/12/16 UPDATE: EURAUD triggered the protective stop at the entry, ending the trade with a profit due to the partials’ realization. We have cancelled NZDJPY sell limit order as the cross failed to break above its resistance and trade in tandem with USDJPY.

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EURNZD Trade Alert

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EURNZD long at market price (1.4752)
Take profit: 1.5020
Protective stop: 1.4625
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 7 days

USDJPY Trade Alert

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USDJPY short at market price (118.37)
Take profit: 115.60
Protective stop: 119.48
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 7 days

Note: This is a 4hr entry. The price may reach 118.70 before reversing lower. We are taking a risk entering prior to the weekly close.

15/12/16 UPDATE II: As we are opting for EURCAD we decided to close 20% of USDJPY short trade with a minimal profit at market price (118.16) as we wish to control our exposure.

EURCAD Trade Alert

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EURCAD long at market price (1.3890)
Take profit: 1.4240
Protective stop: 1.3764
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 7 days

15/12/16 UPDATE: Long EURNZD is an expensive trade to hold due to the interest differentials. We are closing 10% of the long trade at market price (1.4797) to reduce the holding costs.

16/12/16 UPDATE: EURCAD is trading at 1.3955 at the time of this writing.

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We are closing 20% of the long trade at market price.

16/12/16 UPDATE II: URNZD is trading at 1.4915 at the time of this writing.

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We are closing 40% of the long trade at market price.

16/12/16 UPDATE III: As this is a 4hr entry, the recent 4hr range is an unhealthy indication. We did not expect to be in a meaningful profit in today’s session but the current range is a typical warning sign. As a precaution we are closing 10% of the short trade at market price (118.10). We are not exiting the trade due to the weekly chart.

16/12/16 UPDATE IV: We decided to limit USDJPY exposure due to the 4hr range. We initially planned to allow the trade more time but we are uncertain it will lead to USDJPY weakness.We are closing another 10% of the short trade at market price (118.13) and shift the protective stop to the entry. Our distance from the market will be minimal but we would rather avoid floating in a drawdown in this trade. The pair may spike above the high to trigger weak stops, the range is an early warning signal this may happen. We can always re-enter at the weekly close if the trade is stopped out.

16/12/16 UPDATE V: Such rallies often followed by fierce retracements. Had this been a weekly chart we would have remained in the trade.

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As this is a daily entry we decided to close the long trade at market price (1.4967).

Note: EURNZD spiked to the 1.4990 when the update was delivered via email.

16/12/16 UPDATE VI: USDJPY triggered the protective stop at the entry. We are aware the price later retraced lower on reports an American underwater drone was seized in international waters, which sparked USD selling in the Forex market. We chose not to re-enter.

18/12/16 UPDATE: As we updated last week, we are tightening the stop in EURCAD. EURCAD is trading at 1.3936 at the time of this writing. We are closing 10% of the long trade at market price and shift the protective stop to the entry. We will be relatively close to the market but the stop must be shifted.

19/12/16 UPDATE: EURCAD is trading at 1.3998 at the time of this writing.

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We are closing 20% of the long trade at market price. We will adjust the stop near the daily close (stop was later shifted to 1.3895).

20/12/16 UPDATE: EURCAD triggered the protective stop at 1.3895, ending the trade with a profit.

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Last Updated on December 31, 2016