Premium Forex Watch Recap: September 2 – 3, 2024

This week, our currency strategists focused on the US ISM Manufacturing PMI data and the Bank of Canada (BOC) Monetary Policy Statement 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 these discussions 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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USD/CHF Hourly Forex Chart from TradingView

On Monday, our currency strategists set their sights on the upcoming US ISM Manufacturing PMI release and its potential impact on the US dollar. Based on our Event Guide for the ISM Manufacturing PMI update, markets were expecting a slight improvement in the index, although the reading was still likely to reflect industry contraction.

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

“Buy the dollar” scenario:

If the PMI came in as expected or lower, we thought the Fed could lean more toward an aggressive rate cut in September, potentially a move of more than 50 basis points. We thought this could attract USD fundamental sellers and had our eye on USD/CHF for potential short strategies to watch given that the recent downtrend retracement may attract technical swing sellers, especially in an environment with reduced risks.

“Greenback Gain” scenario:

If the US PMI were to surprise higher, we thought this could ease US recession concerns and boost the dollar in the near term. We were watching USD/JPY if this scenario plays out, as the pair’s recent behavior was showing signs of a potential reversal from its recent downtrend, and let’s not forget the still wide interest rate policy divergence between the Fed and the Bank of Japan. which could eventually re-attract the transport traders.

What actually happened

Well folks, Tuesday rolled around and the US ISM Manufacturing PMI decided to throw us a mixed bag of results. August’s reading came in at 47.2, up from 46.8 the previous month, but missing the consensus of 47.5. While this still pointed to a contraction in the manufacturing sector, there were some interesting details in the report:

• The price index advanced from 52.9 to 54.0
• The employment index improved from 43.4 to 46.0
• New orders posted another monthly decline
• Production also declined

Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee, noted, “Demand continues to be weak, output has declined, and inputs have remained accommodative.” He also noted that companies have shown a reluctance to invest in equity and stocks due to current federal monetary policy and election uncertainty.

Market reaction

Initial market reaction was somewhat muted as traders digested the mixed signals from the report. Looking at our USD/CHF chart, we can see that the pair initially saw a small rally following the PMI release, climbing from around 0.8460 towards the 38.2% Fibonacci retracement near 0.8480.

However, the pair’s upward momentum was short-lived. The slightly better-than-previous but still contractionary PMI reading, combined with a drop in new orders and manufacturing, appeared to reinforce the narrative of a slowing US economy. This, in turn, fueled speculation about potential Fed rate cuts, putting pressure on the dollar.

As the week progressed, USD/CHF continued its decline, falling below the S1 pivot point (0.8427) and reaching the S2 level (0.8358). The pair found some support around the psychological level of 0.8400, but the overall trend remained bearish.

Interestingly, USD/CHF’s downward trajectory was further strengthened by additional US economic data released later in the week:

1. Wednesday’s JOLTS job openings figure was weaker than expected and marked a negative revision to the previous report.

2. Thursday brought a downbeat job cuts report from Challenger and a lower-than-expected ADP figure on nonfarm payrolls.
3. Friday’s highly anticipated US employment report initially caused some confusion in the markets. While lower-than-expected job growth and downward revisions initially supported the Fed’s 50-basis-point tapering narrative, the lower unemployment rate and higher wage growth led to a shift in expectations toward a discount of 25 basis points.

verdict

So how did I do it? In our initial discussion, we mentioned potential short setups on USD/CHF if US manufacturing PMI declined, which it did (despite some mixed components). If this strategy was followed, it is “highly likely” that it will support a net positive, given that the market has seen strong bearish momentum and closed below both the discussion and event price areas at Friday’s close.

For those who were bullish on USD/CHF when the fundamentals and technicals kicked in on Tuesday, they likely saw the best potential return on risk. The strong downward momentum provided multiple opportunities to capitalize on the move:

1. An initial entry could have been taken on failure to break above the 38.2% Fibonacci retracement level with a stop loss above the recent swing high.
2. Traders could have added to their positions or entered a break below the S1 pivot point (0.8427).
3. More conservative traders could have waited for the break below the psychological level of 0.8400 before entering and still captured some pips before the weekend.

In all cases, persistent bearish momentum provided ample opportunity to track stops and capture a significant portion of the move.

EUR/CAD Hourly Forex Chart from TradingView

On Tuesday, our FX strategists set their sights on the upcoming Bank of Canada Monetary Policy Statement and its potential impact on the Canadian dollar. Based on the Babypips.com Event Guide for the BOC decision, markets were expecting a rate cut of 25 basis points, with the potential for signs of further easing.

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

“Loonie Bounce” Scenario:

If the BOC only delivered the expected 25bps cut without strong dovish signals, we thought this could lead to a “buy the rumour, sell the news” reaction that could support the CAD. This scenario aligned with GBP/CAD’s recent downtrend and manual channeling behavior pattern on the 1-hour chart.

“Loonie Dive” Screenplay:

If the BOC cut rates and signaled a more aggressive easing cycle, we anticipated that this could affect the CAD. We have been eyeing EUR/CAD for potential long strategies, especially given its position near a long-term support area and the formation of a consolidation that could lead to buying momentum on an upward breakout.

What actually happened

Well folks, Wednesday is here and the Bank of Canada has decided to serve up a mixed platter that will make even the most seasoned forex chef scratch their head. As expected, BOC cut overnight rate target by 25 basis points to 4.25%marking the second consecutive interest rate cut in its monetary policy cycle.

Key points from the BOC statement and press conference:

• The global economy expanded by about 2.50% in the second quarter, in line with July projections.
• Canada’s economy grew 2.1% in Q2, slightly stronger than forecast.
• Inflation eased further to 2.5% in July, with measures of core inflation averaging around 2.5%.
• High shelter price inflation remains the largest contributor to headline inflation, but is beginning to slow.
• BOC Governor Tiff Macklem emphasized that the risk of inflation becoming too weak is now factored into rate decisions.
• Macklem said the BOC is “ready” to take a “bolder step” on rate cuts if necessary.

Market reaction

The initial market reaction to the BOC release saw a brief strengthening of the Canadian dollar across the board, signaling a “buy the rumour, sell the news” reaction. However, this was quickly reversed against most of the majors before the start of the next hour.

Looking at our EUR/CAD chart, we can see that the pair initially saw a small decline following the BOC release, falling from the 1.4970 level towards the pivot point (1.4968). However, the pair’s downward momentum was short-lived here as well.

As the press conference progressed and Governor Macklem has hinted at the possibility of more aggressive easingEUR/CAD found support and started moving higher. The pair broke above the pivot point (1.4968) and the 100 SMA, triggering our bullish scenario.

The upward momentum continued, with EUR/CAD breaking above the pivotal R1 level (1.5049) and reaching the psychological level of 1.5100. This move aligned perfectly with our ‘Loonie Dive’ scenario as the market priced in the potential for more rate cuts from the BOC.

Interestingly, EUR/CAD’s upward trajectory has been further strengthened by broader market dynamics:

1. Risk reduction flows accelerated later in the weekbenefiting the euro against the commodity-linked Canadian dollar.
2. Crude oil prices fell, putting further pressure on the loonie.
3. Mixed Canadian employment data on Friday, contrasted with a dominant US jobs update, added to the overall risk-averse sentiment.

verdict

So how did I do it? In our initial discussion, we mentioned potential long setups on EUR/CAD if the BOC signaled a more aggressive easing cycle, which it did via Governor Macklem’s comments. If this strategy was followed, it is “highly likely” to support a net positive result, given that the market saw bullish momentum with very little pullback and closed above both the discussion areas and event prices at the close of Friday.

For those who were bullish on EUR/CAD when both fundamental and technical arguments were triggered on Wednesday, they probably saw the best potential return on risk. The strong upward momentum provided several opportunities to capitalize on the move:

1. An initial entry could have been taken on the break above the pivot point (1.4968) and 100 SMA, with a stop loss below the last swing low.
2. Traders could have added to their positions or entered a break above the R1 pivot level (1.5049).
3. More conservative traders could have waited for the break above the psychological level of 1.5100 before entering and still captured some pips before the weekend.

In all cases, the persistent uphill tempo provided ample opportunity to follow the stops and capture a significant portion of the movement.