Our forex strategists had a very effective week as they focused on the effects of geopolitics on the FX markets and a calendar heavy with top tier economic catalysts.
Three out of four discussions played out strongly in their favor, highly likely leading to positive outcomes for a wide range of risk management styles. Check it out!
EUR/CHF 2-Hour Forex Chart by TradingView
On Monday, we kicked off the week with a look at EUR/CHF, which was in a clear bear mode on the price chart. Geopolitical fears became the main market driver the previous week, and it looks like the Swiss franc has been the biggest beneficiary among the major currencies due to its “safe haven” and neutral status.
After a spike lower, the market began to bounce, possibly on receding geopolitical fears as Israel did not begin a ground counter attack on Hamas and looked to prepare evacuation corridors for civilians. This prompted traders pulled longs from the franc and pushed EUR/CHF higher back to the pivot point.
We thought that if the market bounced further, traders may jump into the downtrend once again, potentially around the R1 pivot point area and falling moving averages, especially if the geopolitical situation worsened once again. We also discussed a scenario that if conditions continued to improve, a break above that area may continue to draw in EUR/CHF buyers.
Unfortunately, the geopolitical situation worsened this week, sparked by news of an explosion at a hospital in Gaza and a large amount of casualties. Also, expectations were on the rise that Israel will begin to move ground forces into Gaza very soon.
This limited the bounce in EUR/CHF to the pivot point area and falling 100 SMA, where the bears began pricing into more geopolitical turmoil ahead and took the pair to the S1 pivot area before stabilizing ahead of the weekend.
Our bear scenario played out and moved favorably, arguably making this strategy discussion effective and likely leading to an positive outcome for a wide range of risk management styles.
GBP/CHF 2-Hour Forex Chart by TradingView
On Tuesday, GBP/CHF hits the top of the watchlist after a lower than expected wage growth update from the U.K., further fueling a peak in the Bank of England’s interest rate hiking cycle.
This would potentially be further confirmed with the upcoming U.K. CPI report, and with GBP/CHF already in bear mode, we decided to look there for potential short opportunities, especially with geopolitical conflict fueling the Swiss franc.
Our base strategy was to see if the Fibonacci retracement and pivot point area would hold, and if bearish reversal patterns and a slower U.K. CPI report emerged, we think that would likely draw in more sellers back into the downtrend.
Well, even before the U.K. CPI report held, the technical area discussed held and lead to lower highs and lows, likely on traders pricing in slowing inflation conditions, and on rising negative geopolitical developments.
Then the market was a tiny bit surprised with the actual CPI numbers coming in a tick above expectations. But given that the inflation rates were relatively inline with previous reads, this was not taken as an overly bullish outcome for Sterling.
Soon after, GBP/CHF continued it slide lower, likely on rising negative geopolitical expectations, prompting a big move to the downside, all the way to the S2 pivot area, or +200 pip move (-1.93% fall) from the 38% Fibonacci retracement area.
It’s a high probability that this discussion lead to a positive outcome for a wide range of risk management styles given the immediate turn lower and near straight momentum move lower this past week.
GBP/AUD 1-Hour Forex Chart by TradingView
On Wednesday, we just got the U.K. CPI print and as mentioned above, they generally came in above expectations but inline with previous reads. This didn’t appear to be a bullish catalyst for Sterling, and with China printing better than expected economic updates just a few hours earlier, we decided to watch for a possible extension of the GBP/AUD fresh bearish momentum.
On the chart, the pair just broke below a rising ‘lows’ trendline but stabilized around the S1 pivot level. We thought that if the market could hold here, it’s likely further sellers focused on positive Chinese data may continue to drive the pair lower.
Unfortunately, that wasn’t the case, likely due to geopolitically induced rising aversion behavior across the markets discussed earlier. This hurts the Aussie more than Sterling in most cases, including this case as Israel-Hamas war developments overshadowed positive updates from China and negative updates from the U.K. We then saw a net negative employment from Australia to spike the pair higher in the early Thursday Asia session.
So, this strategy did not likely lead to a positive outcome, but if you were paying attention to the fundamentals it’s likely you would have adapted and avoided a short risk management plan on GBP/AUD this week. If anything, paying attention to the fundies would have likely led to a shift to a long bias on the pair, potentially leading to a positive outcome if risk management properly.
XAU/USD 15-min Gold Chart by TradingView
On Thursday, Gold was in our sights as geopolitical tensions were on the rise, especially expectations of an impending move by Israel into Gaza to counter attack Hamas. Also, with sticky inflation signals all week and speeches from FOMC members ahead (likely to signal rate hike pauses for now), the uptrend in Gold (XAU/USD) was the most interesting short-term strategy idea for the session.
This was especially the case after an upside descending triangle break on the 15-min chart that could draw in technical buyers along with fundamental buyers trying to price in geopolitical risks and a Fed peak rate hike scenario.
Well, the fundies certainly looked good for a bullish position as FOMC speeches generally signaled another hold at the next meeting, but kept the door open to rate hikes given sticky inflation conditions and the resilient U.S. employment and consumer situation. These speeches correlated with a pop higher in XAU/USD ahead of the Friday Asia session, with gold eventually making one last push higher to nearly test the $2,000 handle before the week close.
Overall, we got a lot of our assumptions correct and the market behavior in our favor, but of course, getting the price outlook right doesn’t mean an automatic positive outcome if risk management wasn’t executed well. But it’s likely that this discussion led to a positive outcome given the strength of the trend without whipsaw volatility.
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