Our currency strategists this week focused on inflation and GDP data, particularly from Australia and the US, for potential high-quality setups.
Of the four scenario/price outlook discussions this week, It can be said that both discussions witnessed the raising of fundamental and technical arguments. To become a potential candidate for Trade and Risk Management. Check out our review of these discussions to see what happened!
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GBP/AUD currency pair 24 hours Chart by TradingView
On Tuesday, our strategists focused on the July 2024 Australian CPI update and its potential impact on the Australian dollar. Based on our event guide, expectations ranged from a 3.6% to 3.4% y/y decline, down from the previous 3.8% y/y CPI reading. While this would be favourable to the RBA’s target, even at 3.4% y/y, the rate of price growth is still uncomfortably high.
With these expectations in mind, here’s what we were thinking:
“Australian Avalanche” Scenario:
If the CPI comes in as expected or lower, we might think that the RBA could start targeting interest rate cuts. This could attract fundamental sellers of the Australian dollar, which would draw us into the AUD/CAD pair which has recently broken its uptrend. This scenario could attract technical sellers as well as bullish investors in this scenario.
Kangaroo Jump Scenario:
If inflation growth in Australia comes in higher than expected, we might think the RBA could maintain its neutral to hawkish stance. This could be a good time for AUD bulls to shine, prompting us to look at GBP/AUD for potential short selling strategies as the pair retests (and finds resistance) above its recent rangebound behavior.
what really happened
Well, ladies and gentlemen, it’s Wednesday and the Australian Consumer Price Index update has decided to give us mixed signals. Data from the Australian Bureau of Statistics (ABS) showed that Australia’s inflation rose 3.5% year-on-year in JulyU.S. consumer prices fell in the third quarter of this year, slower than the 3.8% increase in June and the lowest level since March, but higher than the 3.4% increase that markets had expected.
Key points from the CPI report:
- Excluding volatile items, the CPI growth rate slowed from 4.0% to 3.7% year-on-year in July.
- Average inflation, which the Reserve Bank of Australia cut, fell to 3.8%, down from the 4.1% annual increase in June and the lowest since early 2022.
- The housing (+4.0%), food and non-alcoholic beverages (+3.8%), alcohol and tobacco (+7.2%) and transport (+3.4%) sectors saw the biggest gains during the month.
Market reaction
Initially, the cooler than expected – but still elevated – July inflation update boosted the Australian dollar. This fuelled our argument for a short bias in GBP/AUD, and we can see that the pair saw an immediate pullback after the CPI release, falling from around the 1.9500 level towards the Pivot Point (P) at 1.9413.
The pair’s downward momentum has received some support from broader market dynamics. The mid-week risk-off sentiment, which initially supported the pound, is starting to ease and is likely to bring more AUD over GBP interest. However, we saw weak Australian capital spending data on Thursday and stagnant retail sales data on Friday, which are likely to cap the AUD’s advance.
By the end of the week, GBP/AUD was hovering around the 1.9400 level, having found support above the pivotal support area S1 (1.9290) before hitting a wall of bears around the pivot point (P) at 1.9413 that we identified.
The verdict
So, how did we do it? In our original discussion, we mentioned potential short selling on GBP/AUD if the Australian CPI came in net positive, which it did. If this strategy is followed, it is “likely” to be supportive of a net positive result, as the market saw strong bearish momentum and closed below the discussion and event price areas at Friday’s close.
For those who were bearish on GBP/AUD when the fundamental and technical arguments were triggered on Wednesday, they likely saw the best possible risk-reward, and those who waited for the trend line to break are also likely to make net gains, even if they were unable to make a positive profit when the price started to bottom out below the 1.9350 level.
USD/JPY currency pair 24 hours Chart by TradingView
On Wednesday, our strategists focused on the release of the preliminary US GDP for Q2 2024 and its potential impact on the US dollar. Based on our event guide for Q2 2024 US GDP, markets were expecting negative or slight revisions from the advanced reading of 2.8% q/q. Based on this, we had two main scenarios in mind:
“Dollar Fall” Scenario:
If GDP comes in as expected or lower, we could conclude that the Fed could be more likely to cut rates in September, perhaps by a larger 50bp move. This could attract major USD sellers, and we have our eyes on AUD/USD for this particular scenario, given the pair’s bullish momentum and recent strong Australian CPI data.
“USD Gain” Scenario:
If US GDP surprises us with an upside, we might think this could ease US recession fears and boost the dollar. We have been watching the USD/JPY pair for this scenario, as the pair’s recent behavior has shown signs of a potential reversal of its recent downtrend.
what really happened
Well, Thursday came, and the US GDP decided to throw us a curveball that would make even Shohei Otani proud. The second version of the US GDP reading was upgraded to show a faster 3.0% expansion in the second quarter of 2024, beating both the initial 2.8% figure and market expectations.
The positive revision came mostly from higher consumer spending on services and goods, especially gasoline and other energy staples. However, components such as nonresidential fixed investment, exports, and private inventory investment were downgraded.
In addition to the positive sentiment towards the dollar, the preliminary price index reading for the same period was raised from 2.3% to 2.5%, beating expectations for a flat reading. The core personal consumption expenditures price index (excluding food and energy) saw a slight decline to 2.8% from the initial estimate of 2.9%.
Market reaction
The market reaction was quick and decisive, which is fully in line with the “USD gains” scenario. The USD/JPY pair, which had been consolidating in a triangle pattern on the hourly chart, broke out to the upside after the GDP release.
Looking at the USD/JPY chart, we can see that the pair actually made an immediate recovery after the GDP release, rising from around 144.50 and breaking the 145.00 “neckline” that we identified in our original discussion. The pair continued its upward movement, breaking the 145.50 pivot point and reaching the R1 level at 146.91.
The stronger-than-expected GDP data, coupled with an upward revision to the price index, reduced market expectations for a significant rate cut by the Federal Reserve. This shift in sentiment provided strong support to the dollar broadly, but especially against the yen, which has been under pressure due to the continued wide interest rate differential between the Bank of Japan and major central banks.
Interestingly, the USD/JPY rally extended into Friday’s session, supported by additional positive US economic data. The release of the core PCE price index (the Fed’s preferred inflation gauge) showed continued inflationary pressures, reducing expectations of near-term rate cuts and providing additional momentum to the dollar.
The verdict
So, how did we do it? In our original discussion, we mentioned watching for bullish candles above the “neckline” at 145.00, the 100 SMA, or the 145.50 pivot point area for evidence of an upside breakout. If this strategy is followed, it is “highly likely” that this discussion will support a net positive outcome.
For traders who executed their trades based on these predictions, there were multiple opportunities to profit from this move:
- An initial entry could have been taken on a breakout above the “neckline” at 145.00, with a stop loss below the breakout point.
- Traders could have added to their positions or entered on a retest of the 145.50 pivot point.
- More conservative traders could have waited for a break above the recent swing high around 146.00 before entering, and still captured some pips before the weekend.
In all cases, the strong momentum provided enough opportunities to track stops and capture a significant portion of the move.