Premium Forex Watch Recap: August 27 – 28, 2024

This week, our currency strategists focused on inflation and GDP data, particularly from Australia and the US, for possible high-quality setups.

Of the four discussions on price scenarios/outlooks this week, Two discussions arguably saw both substantive and technical arguments unleashed to become potential candidates for a trading and risk management overlap. Check out our review of those talks to see what happened!

Watchlists are discussions of price perspective and strategy supported by both fundamental and technical analysis, a crucial step towards creating a high quality discretionary business idea before working on a risk management and trading plan.

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GBP/AUD Hourly Forex Chart from TradingView

On Tuesday, our strategists set their eyes on the Australian CPI update for July 2024 and its potential impact on the Australian dollar. Based on our Event Guide, expectations ranged from a decline of 3.6% to 3.4% year-on-year, down from the previous figure of 3.8% annual CPI. While this would be favorable to the Reserve Bank of Australia’s objectives, even at 3.4% y/y, the rate of price growth is still uncomfortably high.

With those expectations in mind, here’s what we thought:

“Aussie Avalanche” scenario:

If the CPI came in as expected or lower, we thought the RBA might start chasing those rate cut scissors. This could attract fundamental AUD sellers, pulling us into AUD/CAD, which has recently seen an uptrend break. This scenario can attract technical sellers along with fundie players in this scenario.

“Kangaroo Leap” scenario:

If Australia’s inflation pick-up is hotter than expected, we thought the RBA could keep its stance neutral on demand. This could be the time for AUD buyers to shine, prompting a look at GBP/AUD for potential short strategies as the pair has retested (and found resistance) at the top of its recent bullish behavior.

What actually happened

Well folks, Wednesday is here and Australia’s CPI update decided to give us mixed signals. Australian Bureau of Statistics (ABS) data showed that Australian inflation rose 3.5% y/y in Julyslower than the 3.8 percent increase in June and the lowest since March, but higher than the 3.4 percent rise that markets had expected.

Key points from the CPI report:

• Excluding volatile items, the CPI fell from 4.0% to 3.7% from a year ago in July.
• Average RBA inflation came in at 3.8%, lower than June’s 4.1% annual rise and marking the lowest since the start of 2022.
• Housing (+4.0%), Food & Non-Alcoholic Beverages (+3.8%), Alcohol & Tobacco (+7.2%) and Transportation (+3.4%) posted the biggest gains for the month.

Market reaction

The cooler than expected – but still elevated – July inflation update initially boosted the Aussie. This triggered our arguments for a short GBP/AUD bias and we can see that the pair experienced an immediate decline after the CPI release, falling from the 1.9500 level towards the pivot point (P) at 1.9413.

The pair’s downward momentum was somewhat supported by broader market dynamics. The risk-off sentiment that prevailed mid-week, which had initially supported the pound, has begun to wane and is likely to bring more interest to the Aussie versus the pound. But, we saw weak capital data from Australia on Thursday and stagnant retail sales data on Friday, which probably put a cap on the Aussie bull run.

By the end of the week, GBP/AUD was hovering around the 1.9400 level, having been supported just above the S1 pivot support area (1.9290) before hitting a bear wall around the pivot point (P ) at 1.9413 that we identified.

verdict

So how did I do it? In our initial discussion we mentioned potential short setups on GBP/AUD if AU CPI turned net positive, which it did. If this strategy was followed, it is “likely” to have sustained a net positive result, given that the market experienced strong bearish momentum and closed below both the discussion and event price areas at Friday’s close .

For those who were bearish on GBP/AUD when both fundamental and technical arguments were triggered on Wednesday, they probably saw the best potential return on risk, and those who waited for the trend line break probably set net earnings, even if they didn’t. manage the positive for a profit when it started to bottom below the 1.9350 handle.

USD/JPY Hourly Forex Chart from TradingView

On Wednesday, our strategists set their sights on the preliminary release of US GDP for Q2 2024 and its potential impact on the US dollar. Based on our Q2 2024 US GDP Event Guide, markets were expecting small to negative revisions from the forward reading of 2.8% q/q. Based on this fact, we considered two main scenarios:

“Buy the dollar” scenario:

If GDP came in as expected or lower, we thought the Fed could lean more toward a September rate cut, potentially a move of more than 50 basis points. This could attract fundamental USD sellers and we have been eyeing AUD/USD for this particular scenario given the pair’s upward momentum and recent strong Australian CPI data.

“Greenback Gain” Scenario:

If US GDP were to surprise higher, we thought this could ease US recession concerns and boost the dollar. We were watching USD/JPY for this scenario as the pair’s recent behavior was showing signs of a potential reversal from its recent downtrend.

What actually happened

Well, Thursday it flipped, and US GDP decided to throw us a curve that would make even Shohei Ohtani proud. The second version of the US GDP reading was updated to show a faster expansion of 3.0% in Q2 2024, beating both the initially reported figure of 2.8% and market expectations.

The positive revision came mainly from higher consumer spending on services and goods, particularly gasoline and other energy commodities. However, components such as non-residential fixed investment, exports and private investment in inventory were downgraded.

Adding to the positive sentiment against the dollar, the preliminary price index for the same period was updated from 2.3% to 2.5%, beating expectations for an unchanged reading. The core PCE price index (excluding food and energy) fell slightly to 2.8% from the initial estimate of 2.9%.

Market reaction

The market reaction was swift and decisive, aligning perfectly with our “Greenback Gain” scenario. USD/JPY, which had been consolidating in a triangle pattern on the hourly chart, broke higher after the GDP release.

Looking at our USD/JPY chart, we can see that the pair did indeed see an immediate rebound after the GDP release, moving up from the 144.50 level and breaking above the 145.00 “neckline” we identified in the discussion our initial The pair continued its ascent, breaking the 145.50 pivot point and reaching the R1 level at 146.91.

The stronger-than-expected GDP data, along with the upward revision of the price index, significantly reduced market expectations for aggressive Fed rate cuts. This shift in sentiment provided strong support for the dollar in general, but especially against the yen, which has been under pressure due to the Bank of Japan’s continued wide interest rate differentials with major central banks.

Interestingly, USD/JPY’s rally extended into Friday’s session, fueled by additional positive US economic data. The release of the core PCE price index (the Fed’s preferred inflation gauge) showed persistent inflationary pressures, further dampening expectations of a near-term rate cut and providing additional support for the dollar.

verdict

So how did I do it? In our original discussion, we mentioned that we watch for ascending candlesticks above the 145.00 “neckline”, the 100 SMA, or the 145.50 Pivot Point area for signs of an upside breakout. If this strategy was followed, it is “highly likely” that this discussion would support a net positive outcome.

For traders who executed on this insight, there were several opportunities to capitalize on the move:

1. An initial entry could have been taken on the break above the 145.00 “neckline” with a stop loss below the breakout point.
2. Traders could have added to their positions or entered a retest of the 145.50 pivot point.
3. More conservative traders could have waited for the break above the recent high around 146.00 before entering and still captured some pips ahead of the weekend.

In all cases, strong momentum provided ample opportunity to track stops and capture a significant portion of the movement.