Good morning traders,
A very important week from an economic standpoint.
This week the FED provides its next interest rate decision, with the market expecting a 0.75% interest rate hike on Thursday morning. Investors and traders will be watching the FED press conference at 4:30am on Thursday morning for an indication into the future guidance/direction. Growth is already slowing in response to the FED’s repeated rate hikes, the housing market is softening, tech companies are reducing hiring and even laying off employees and unemployment claims are edging higher. As economic data worsens across the globe, bets are growing that the FED will need to pivot leading into Q4 this year and the September meeting is being eyed as the potential turning point. Any indication that the FED will take a less aggressive stance on monetary tightening will give the financial market something the cheer about.
The US dollar softened last week with the DXY retreating from its tag of the major trend line resistance at 109.30
DXY Weekly Chart
There is a bearish divergence coming into play on the weekly time frame which is one of the first indications of a long-term trend change. Buyers are running out of momentum as the US dollar long trade becomes overcrowded.
DXY 4 Hour Chart
However, the DXY is still very much in a bullish trend, and NO key technical structures have been broken (yet). The DXY is trading on a rising trend line support and may have a rally into the FED meeting on Thursday morning. We are still long on the S&P500 and the EURUSD and our stop losses are at breakeven on both positions, therefore we are not at “risk” in the market. For our positions to continue in the correct direction, we would need to see a technical breakdown from the rising trend line support, which would further indicate investors are beginning to rotate out of the safe haven asset and back into risk-on assets. Leading into the FED meeting on Thursday morning, there is a chance of a DXY rally from support, and there are a number of charts indicating short-term US dollar strength.
USDCAD 4 Hour Chart
Taking a look at the USDCAD, there is a potential head and shoulders structure setting up. The USDCAD is pushing higher from the 1.2840 support zone leading into the FED meeting on Thursday. The sharp turn higher from support is indicating buyers are stepping into the market this week. We will consider a USDCAD short position during the later stages of this week if there is a rejection from the shoulder line at 1.3060. It will also depend on the FED statement on Thursday morning.
AUDUSD 4 Hour Chart
The AUDUSD broke out of a negative trend line resistance on the 18th of July and has possibly begun a new wave to the upside. However, the AUDUSD is currently breaking down from a rising trend line support, which indicates over the short term leading into the FED meeting on Thursday morning the AUDUSD may retrace lower. For the AUDUSD to confirm a new bullish trend, there will need to be a higher low on the daily time frame, and the 0.6683 swing low is the bullish invalidation level. We are sitting on our hands for the time being waiting for the price action to unfold leading into the event on Thursday morning. Keep in mind there is also inflation data due from Australia on Wednesday, which will also provide short-term volatility.
So how do we play this trading week?
We are not looking to take excessive risk trading the US Dollar leading into the risk event on Thursday morning. There are a couple of charts indicating short term US dollar strength as the DXY takes a technical bounce from the rising trend line support. We will become more aggressive on a US dollar SHORT scenario once a breakdown from the rising trend line occurs. If the DXY moves back to new highs, we will have to reconsider our US dollar bearish reversal scenario.
There are a couple of other charts we are watching for opportunities outside of the US dollar.
Crude Oil 4 Hour Chart
As you know we have been following Crude Oil lower over the past couple of weeks due to the large bear flag breakdown. Crude oil moved just shy of our 87.63 target level, which would have been a 100% measured move down from the initial decline in early March. We are now watching for a possible long trade setup. This also aligns with the USDCAD head and shoulders formation highlighted above due to the inverse correlation.
Crude Oil 1 Hour Chart
The price action on crude oil has created a “gap down” in the market. These gaps are almost always filled at some point in time as liquidity providers will need to offload their positions. Technically speaking, there has been a falling wedge breakout (BULLISH), and an inverse head and shoulders structure is possibly setting up (BULLISH). Therefore we are watching for a breakout above the most recent negative trend line resistance before considering going long on the commodity.
Let me know if you have any questions on the information above,
Good luck this week.