What’s the best trade going to be over the FOMC?
After the end of QE and the first Fed hike, USDJPY collapsed nearly 2500 pips before the Trump jump. Since the more recent policy moves from late in 2016, USDJPY has fallen over 1300 pips. What part of that picture do dollar bulls not understand when calling for a higher dollar on higher US interest rates and modest GDP growth? You can dissect the Fed language, you can dissect the economy, you can dissect Trump and his policies to your hearts content. Analysts, economists and everyone else can waffle on about facts, figures, and what their tea leaves are saying but for traders, the answer is as plain as the nose on your face. There’s more than a very high chance that any dollar rally today doesn’t last and ends up getting sold because that’s exactly what has been happening for over a year (on this recent policy run) and there’s nothing at the moment to change that fact.
So, here’s my big issue with today’s FOMC. How much different, or more importantly, hawkish can new Fed chair Jerome Powell be? Four hikes in a year is a big deal for any central bank, so how can Powell give dollar bulls something that will meaningfully lift the dollar? Answers on a postcard please because I can’t think of any.
The main thing the market wants is further confirmation that newbie Powell will keep the 4 hikes intact for 2018. That’s likely to be a given considering he’s very much cut from the same cloth as Yellen. However, if that’s the case, what did Trump see in Powell that he didn’t see in Yellen? That question brings the biggest risk for today’s meeting. Will Powell “hawk” up what we already know is happening? It will have to be something very special to change the trend in the dollar. There’s not a lot he can do about the 2018 picture except to maybe prompt 50bps hikes in some way but that’s a long shot. Perhaps he’ll start to set his stall out for hikes in 2019, although it’s a bit early.
Being his first meeting, and the fact he’s not a feather-ruffler, the likely scenario is that he sees himself calmly through this expected hike and re-affirms the Fed’s path without making any waves in the presser. If that’s the case then there’s little or no upside to the dollar. But, remember, he’s not running the show alone. There’s new voting members, with new views and expectations and that could be a wild card in all this. I don’t much care for the dot plots most times but due to the change of guard, these one’s could be important for seeing whether the 4 hikes in 2018 is going to be maintained or whether there’s new caution coming in. Anything that’s seen as lowering the chances of completing the 2018 path is going to hurt the dollar bigly.
Throw in the new Fed economic forecasts too and there is enough risk in this meeting to make prices more volatile than recent meetings. Small though it may be, there’s also the risk that they don’t hike this month but that would leave us with the possibility of two consecutive hikes.
What’s the best trade for today?
Just because I don’t see any reasons for the dollar to go on a rip-roaring run higher doesn’t mean it won’t go up. For USDJPY, the fact remains that we have some very good support down here and we’ve been stuck in a very tight range (108-105) for pretty much the last two months. That means there’s room to roam and if the downside is holding, the upside is the only way left to go. Given that the last couple of Fed meetings had very muted price action, either edge of this range looks good to fade any moves into them, depending on what that news is. If it’s the same old same old and nothing new, then fading into these edges is the way I’ll be looking to play it.
But that’s not the main trade I’m looking at.
I think GBPUSD could be the best trade to grab over the Fed. Some of you may remember back in 2016 when a great trading play was to buy any USDJPY dip over BOJ meetings (which happened several times the day/night before the FOMC’s), to run into the FOMC. Good pips were made exiting into the pre-FOMC USD buying we often saw, meaning that good money was made well before the FOMC announcement. I’m thinking that there’s a similar trade to be had for the FOMC and BOE. If the market takes Powell favourably and buys the buck, GBPUSD could be the dip pair to buy to run into what could be a hawkish BOE. So far, the big UK data hasn’t rocked any boats, so if a May hike is on the cards, the chances that Carney’s tips the nod tomorrow is greatly increased. Whether it happens or not could be irrelevant if any dip is washed out by expectant GBP traders tomorrow. We could find that our money is made well before the BOE and then we can sit back and watch it with no risk in the game.
As for levels, the low 1.39’s would be on my hit list. There’s some decent moving average convergence down there (the 55 DMa is there too at 1.3905) and it’s been a pretty decenmt S&R point.
That’s the main trade I’ll be watching for tonight but I’m expecting the song to remain the same from the Fed’s new lead singer. Under 1.3900, 1.3875/80 and down to 1.3850 would tickle my fancy. What I’m really going to be looking for is what the news is that sends the dollar higher and whether it’s hot or not to hit a GBPUSD dip, so althouhg I’ll be watching the levels, I’ll also be trading on the fly if that’s what I feel is necessary.
A special thank you also to @victorleonadib for the fantastic cover picture. The man is a genius.