Our strategists mixed it up this week by focusing on a major FX pair, an equity index and a currency cross.
One out of three discussions was arguably net effective towards a positive outcome, while the other two saw neutral outcomes. Check out our reviews to see what happened!
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On Tuesday, EUR/USD was at the top of our watchlist ahead of an active forex calendar from the U.S. (including a key U.S. inflation metric — the core PCE price index) and inflation data from the Euro area this week. This momentum shift comes after a period of USD dominance, likely sparked by profit-taking activity. We discussed both bullish and bearish scenarios based on fundamental and technical analysis.
After our discussion, the EUR/USD sellers steadily outpaced buyers, with a pick up in volatility around mixed but arguably net negative U.S. data. While U.S. durable goods data came in net positive (new orders and shipments up after two months of declines), the CB consumer sentiment survey results showed declining optimism in U.S. consumers, a potential signal of slowing activity ahead. The bearish reaction in EUR/USD may have been a risk aversion move, something we see often when recession worries rise to the top of focus intraday (i.e., flow to safe haven currencies like the U.S. dollar).
The market continue to trend lower on Wednesday, and on Thursday, we saw a notable pickup in volatility, surrounding fundamental updates from both the Euro area and the U.S. Weak German retail sales data was likely the catalyst for the swift move lower, and slower than expected growth in Euro area private loans may have been a draw of sellers as well.
The pair did quickly bounce during the following U.S. session, again correlating with a bucket of U.S data releases, most notably a better than expected final U.S. GDP read at 3.4% (vs. 3.2% forecast/previous) and weekly initial jobless claims update. We also got better than expected revised U.S. consumer sentiment data, all likely prompting traders to price in a mix of scenarios ahead, including a “soft landing” and lower odds of aggressive rate cuts ahead.
After these updates, the market resumed its downtrend momentum into the Friday session, where we saw several inflation updates from the Euro area and the U.S. In Europe, France’s preliminary CPI read came in well below forecast and previous reads at 0.2%, and we also saw consumer spending in France come in below expectations at 0.0%.
In the U.S., the Fed’s favorite inflation gauge (U.S. Core PCE price index) came inline with expectations at 0.3%, but below the previous read of 0.5%, prompting a quick fall in the U.S. dollar. This was soon followed by comments from Fed Chair Powell at an event in San Francisco, basically re-iterating no rush to cut interest rates. This quickly turned intraday sentiment on USD and solidify its gains on the week.
In our original discussion our core scenario to watch was a scenario of “if U.S. core durable goods orders data highlights a strong U.S. economy, then EUR/USD could draw in sellers at the current inflection point.”
In general it appears that did play out, and given the extended move following that trigger, we’d argue this discussion was likely supportive of a positive outcome. But with several more fundamental data points to go through, including the highly anticipated U.S. core PCE price index release, risk and trade management ideas/execution would have likely had more weight on the potential outcomes in this particular case.
S&P 500 (US500) 1-hour Chart by TradingView
On Wednesday, we turned to the S&P 500 index as it had fallen for several days, creating a potential technical buying opportunity in its massive uptrend. We noted potential volatility catalysts, including FOMC member Christopher Waller’s speech, as well as Thursday and Friday’s data buckets from the U.S. as we discussed in the EUR/USD.
Our main thought was that it was possible the market could fall as low as the 50% Fib area given the daily average volatility range if short-term bearish sentiment held, which happened to line up with other technical arguments, including a broken previous resistance area, moving averages and rising ‘lows’ pattern. That was our main watch area to see if technical buyers would hop in, or if the fundies would draw in buyers as well.
Well, equity futures jumped ahead of the Wednesday U.S. session close no apparent direct catalysts. Some arguments could be the fall in U.S. Treasury yields on the session, possible pre-emptive positioning ahead of Fed speeches and U.S. data, or even trend traders continuing to jump in small pullbacks (a pattern we’ve seen pretty much through 2024).
Whatever the case may be, there was no anticipated deep pullback to our target area of interest for a long play, making this discussing neutral towards supporting a positive outcome in our opinion. For those who were in the “shallow pullback and buy camp” it’s likely you saw a positive outcome, if you were able to get in ahead of that Wednesday spike higher before the U.S. session close.
On Thursday, was saw the strong uptrend in CAD/CHF, likely a reflection of the Swiss franc’s weakness (triggered by the Swiss National Bank’s unexpected interest rate cut is a key driver of this upward trend) and a slew of bullish arguments for the Loonie recently (Canada’s positive retail sales figures, rising crude oil prices).
After a period of consolidation, we thought a fresh leg higher could be in the cards, sparked by upcoming Canadian GDP data, which had odds of coming in not only above the previous read, but also surprising above expectations, as discussed in our Event Guide. If that scenario played out, we thought that would lower rate cut probabilities for the Bank of Canada, which may draw in fundamental CAD bulls.
Well, the Canadian GDP did come in above both expectations and previous at 0.6%, but unfortunately this did not bring the bullish momentum we were hoping for in CAD/CHF. While the event did bring up the Loonie against the rest of the majors, the Swiss franc also caught a bid during the Thursday U.S. trading session (possibly short profit taking after SNB Vice President Martin Schlegel comments that SNB always ready to intervene if necessary). Strength in both currencies cancelled out any possibility of momentum moves in CAD/CHF, which did eventually trade sideways for the rest of the week.
Given that our fundamental scenario expectations did trigger a long reaction in CAD, but the resulting price behavior in CAD/CHF was consolidation, we argue that this discussion was also neutral towards supporting positive outcomes.
The fundamental arguments for choosing CHF as the counter was sound, but we just didn’t catch a break this time around, which happens with any trading market you choose, and why risk & trade management is the most important trading skill in the overall trading skill set.
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