What a wild week in the markets with geopolitical developments dominating early and late in the week, mixed with top tier U.S. catalysts. This added a bit of a challenge for our strategists, who arguably had a net effective week despite unusual geopolitical variables thrown in.
Two out of four strategies saw the target asset move in their bias favor by week close, with one other moving favorably for some time before the week close.
AUD/USD 2-Hour Forex Chart by TradingView
On Monday, we found that top tier catalysts from the U.S. may bring potential opportunities this week with the latest FOMC meeting minutes and September U.S. CPI update on date. Expectations were that they could remind traders that the Fed is still pricing in at least one more interest rate hike this year, a potentially bullish influence on the U.S. dollar.
That led us to Dollar pairs, which is where we spotted AUD/USD in overall downtrend mode, and where the bulls were recently rejected at a technical confluence (0.6400 major psychological level & Pivot Point). Our thought was that if this area holds, then a move lower to the S1 pivot area / 0.6300 was a possibility if our fundamental triggers played out.
After our initial discussion, the market actually moved a bit higher before resistance and bearish reversal patterns developed, right before a less hawkish set of FOMC meeting minutes and a U.S. CPI read that signaled continued sticky inflation conditions in the U.S.
The CPI event was the catalyst that got traders back on the USD long train, along with rising risk aversion behavior due to the major geopolitical event (the breakout war between Israel-Hamas) dominating focus at the end of the week.
Overall, this was an arguably effective strategy discussion as the price is below our target entry area at week close, but risk management would have been more of a factor in determining the likely outcome.
XAU/USD 30-min Forex Chart by TradingView
On Tuesday, we turned to Gold (XAU/USD) for a potential opportunity as recent geopolitical events seemed to have benefited the precious metal, even outweighing the Dollar’s usual “safe haven” draw.
We also saw that the pair was consolidating tightly between $1,855 – $1,865, and with U.S. dollar catalysts ahead, we thought that this was a combo perfect to apply a consolidation-breakout strategy.
And given the elevated levels of uncertainty, we didn’t have a broad bias lean and discussed fundamental triggers for both the long and the short side, mainly potential behaviors around U.S. inflation updates. We also mentioned that if the situation in Israel worsened, then that would likely drive traders more into gold than the U.S. dollar.
Well, we got a sustained upside break not too long after our discussion, actually ahead of the U.S. PPI and CPI data. The CPI update was the catalyst that sparked a big reaction, and as discussed, it was sticky enough to draw in USD bulls and bring XAU/USD lower on the session.
On Friday, news of Israel asking civilians to evacuate Gaza City signaled an impending major military operation (and likely much more casualties), prompting the traders to move into gold further during the Asia and London trading sessions. XAU/USD rallied through the remaining session with barely a hiccup, ending at week highs heading into the weekend.
This was a very effective strategy discussion as the price is 2 – 3 times the daily ATR from our discussion price area. There was even a chance for those who missed the initial breakout to jump in the uptrend on the pullback after U.S. CPI. And given the strong directional moves, risk management strategy choices would have been less of a factor towards determining the likelihood of a positive outcome.
Crude Oil Futures 1-Hour Forex Chart by TradingView
Crude oil was also a massive mover due to the breakout war in the Middle East, gapping higher right at the week open in response to Hamas’ attack on Israel on Saturday and Israel’s declaration of war on Hamas on Sunday.
Strangely enough, that was the limit of the reaction as oil quickly stabilized into a tight range around the $86.00 handle. Traders were likely waiting to see how this situation would develop, along with waiting for major economic catalysts and oil inventory data ahead before making further moves.
Oil soon broke consolidation to the downside, possibly on rising expectations of sticky U.S. inflation reads and/or a signal that recent bearish pressure on oil remains.
It was there that we discussed several scenarios, with our base strategy to be to wait for another potential bounce higher, see if the strong technical area of interest (Pivot point up to 38% Fib) is retested, and if bearish reversal patterns form on strong U.S. CPI, higher oil inventories, and/or weak Chinese economic updates.
Well, the market bounced and our fundamental triggers actually all played out on Thursday. After the sticky U.S. inflation update and rise in oil inventories, crude oil prices fell from roughly $85.00 to $82.50.
The strategy was looking good until Friday, where an impending escalation in the Israel-Hamas conflict brought back oil bulls, sparking an extremely strong rally from $83.70 to $87.70ish at the week close.
The strategy discussion was effective in the short-term, but the potential of it leading to a positive outcome highly depends on risk management. And a lot of it depends on whether or not you were watching the news and markets to react to fresh catalysts / reactions on Friday.
AUD/USD 1-Hour Forex Chart by TradingView
On Thursday, we took another quick look at AUD/USD after the sticky U.S. CPI update sent the Greenback higher against the major currencies.
With potential catalysts from both China (trade, monetary conditions, and inflation data) and the U.S. (consumer confidence) ahead, we thought there was still some volatility left in the pair before the weekend and explored both bullish and bearish scenarios in our discussion.
After our post, AUD/USD continued to move lower during the Thursday U.S. trading session and didn’t stabilize until right above the 0.6300 handle. That negated our base strategy as we didn’t get a bounce to the technical area of interest before the Chinese data came in weaker-than-expected to put pressure on the pair, along with geopolitical induced broad risk aversion behavior.
Overall, this strategy discussion had low effectiveness, but while our price and fundamental scenario didn’t plan out as discussed, those who did play China weakness and broad risk aversion behavior may have see a positive outcome if risk managed properly and for quick pips.
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