As expected with major events on the calendar, it was arguably a tough week for our strategy discussions. Our directional biases were mostly correct, but event outcomes and fresh developments fundamentally invalidated most of our setups.
Still there were plenty of lessons to learn from this week, mainly on how we have to stay on our toes when top tier events are on the calendar!
AUD/USD 1-Hour Forex Chart by TV
On Monday, the symmetrical triangle pattern on AUD/USD made it to the top of the watchlist with quite a few major events lined up for the week. Consolidation patterns are usually great setups with a rise in volatility expectation, especially with events like flash PMI updates and the annual Jackson Hole Symposium ahead.
Recent sentiment has been broadly negative due to rising contagion fears in China, prompting us to lean bearish on AUD/USD at the start of the week. Our price strategy was that if we saw recession fears grow prompted by comments from the Jackson Hole meeting AND a sustained bearish break of the triangle pattern, we’d lean bearish and look for further downside moves.
Unfortunately for our bias lean, we never got the sustained bearish break at the early part of the week. Volatility did pick up, but in favor of the bulls, especially after the negative round of global PMIs on Wednesday prompted traders to price in a peak rate hike cycle speculation further (which favored risk assets immediately and was negative for the Greenback).
After that upside triangle break, we took off AUD/USD from the watchlist, but it looks like the market finally did break the “rising lows” pattern on Friday and was able to sustain that break after an arguably hawkish speech from Fed Chair Powell at the Jackson Hole Symposium (Fed is still open to rate hikes if needed) and weaker-than-expected U.S. consumer sentiment data.
If you held strictly to the FA and TA setups through Friday, this discussion may have had a positive outcome for a short-terms position if risk managed properly. Or possibly it may have a longer-term positive outcome if USD strength continues next week. Something to watch!
EUR/GBP 30-min Forex Chart by TV
Ahead of August Flash PMI updates from both the Euro area and the U.K., we took a look at EUR/GBP on the one-hour chart. While both were expected to print negative PMI data, we leaned bearish on the EUR/GBP due to monetary policy divergence expectations (the European Central Bank is more likely to hold on rate hikes than the Bank of England).
Our strategy was to look for a short opportunity IF Euro area PMIs disappointed vs. better-than-expected PMI data from the U.K. If those event outcomes played out, we said we’d look for bearish reversal patterns around the Fibonacci retracement area before considering a short on the pair.
Not too long after our post, the pair dropped during the Tuesday session with no major direct catalyst present. Arguably, this was likely traders pricing in high expectations of weak Euro area PMIs.
On Wednesday, our preferred fundamental scenario didn’t play out as both economies gave us negative PMI reads, first pushing the pair lower after the Euro area released their numbers, and then a big spike higher in EUR/GBP after the U.K. gave us a very disappointing read.
That negated our short-term fundamental bias setup, so no trade for us. Plus, it looks like the weak PMIs from the U.K. far outweighed in influence on the pair as the market steadily moved higher throughout the rest of the week.
Our initial bearish lean was correct (and likely benefited more aggressive risk managers) but the event outcomes didn’t align with our fundamental setup that made a short idea valid.
So, there was no A-plus setup here, but there was plenty of volatility and opportunity here in EUR/GBP for those who adapted to fresh data and rode broad weakness in the British pound after the weak U.K. PMI data update.
AUD/USD 1-Hour Forex Chart by TV
On Wednesday, we focused back on AUD/USD once again as the upside break in consolidation could take the pair up to a potential resistance area. Our fundamental scenario to argue for a bearish lean on the pair was that if U.S. PMI figures surprised positive, that could draw in USD bulls looking to price in elevated odds of a September rate hike.
As mentioned above, U.S. PMI data disappointed as expected, prompting USD weakness and invalidating our fundamentally bearish lean on AUD/USD. The reaction to the U.S. PMI event was significantly bearish for the Greenback overall as it fell against all of the major currencies.
This actually brought the market up to our technical area of interest, the Fibonacci retracment / broken support area, which could draw in technical sellers looking to play the longer-term trend lower.
It looks like that’s what played out as broad market sentiment shifted negative / USD sentiment shifted positive during the Thursday London session. There doesn’t seem to have been a direct catalyst for the changes, but arguably, it could have been profit taking ahead of the highly anticipated Jackson Hole Symposium event.
The move lower continued through the rest of the Thursday and Friday sessions, potentially with the help of better-than-expected U.S. weekly jobless claims data and Fed rhetoric from Jackson Hole that hasn’t yet signaled peak interest rate hikes soon.
For those who held on to the technical setup despite the early fundamental invalidation, this discussion on AUD/USD likely lead to a positive outcome given the 100 pip move lower from the discussed resistance area.
S&P 500 (US500) 30-min Forex Chart by TV
On Thursday, our FX strategists saw the fresh anti-dollar sentiment ahead of the Jackson Hole meeting, and thought that the uptrend in the S&P 500 index could be a way to potentially roll with it.
They also saw that fresh catalysts were ahead in the form of the weekly initial jobless claims and the July’s U.S. durable goods orders data, and if they came in net negative, that could spark further peak inflation rate speculation (i.e., negative USD sentiment).
Of course, after a very bullish move on Wednesday for US500, our strategists thought that a bull move wouldn’t likely come until the market pulled back.
They cited the technical confluence around the Fibonacci retracement area, rising moving averages and pivot point support levels as the area to watch for bullish reversal patterns before considering a long position IF U.S. data came in net negative.
Well, US500 quickly dropped during the following U.S. session. The U.S. dollar caught a big bid, likely on a combination of better-than-expected U.S. jobless claims and on hawkish commentary from Fed officials at the Jackson Hole Symposium (signaled openness for further hikes & policy likely to remain restrictive for a while).
These updates essentially negated our bearish USD lean, especially after there was no support or bullish reversal pattern at our technical area of interest around the Fibonacci retracement area / rising moving averages / “rising lows” confluence.
So, the long bias lean was fundamentally invalidated, but if you were able to adapt to the fresh developments during the U.S. session, a properly risk managed short position would have likely led to a positive outcome given the big drop on the session.
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