Theory Into Practice: Enter Mr. Powell!

Powell has spoken for the first time as chairman of the FOMC. Whilst the market never underestimated the importance of his words they may not have been expecting quite as hawkish a beginning as the one they heard. It clearly projected a faster pace of rate hikes than previously. he pointed to the strength of the economy and even mentioned the word overheating.

Why was this important? US monetary policy is pivotal…it is the reserve currency and everything in the financial markets is affected by it. We have seen a downward path in the USD eve whilst the yield was advancing but on Powell’s words they rallied together:

Mr Powell pointed to improvements during this first quarter and to the benefits of fiscal policy on the economy and expectations for inflation were raised and risks were lessened as growth increases.

Remember the fear that inflation brought a few weeks ago? Tuesday post testimony,  another down move in the US and global equities: we wait to see where this goes…Wednesday will be important:

Gold suffered as the USD rallied:

Crude also fell:

So from risk-on that we have seen for a week, to largely risk-off the reaction late Tuesday so we know the recipe.

In terms of sentiment, equities remain key as they digest the FOMC stance and that can change and does change in these surprising times.

As before my strategy is the same…learn to recognise the risk conditions, watch the major daily and weekly levels and use them to base trades.

The Watchlist

Please note I am writing this as a result of the testimony and I will be on vacation for 10 days. I will be watching how the market unfolds, but clearly alternative strategies are essential to trade this market.

EURUSD

This is to be hampered by Italian elections…no doubt Draghi is relieved at the news from the US, but the levels are prepared for weak USD if and when it runs out of steam.

Gold

Lower pullbacks, eye on the USD

EURGBP
I prefer the short side from the high resistance. I took this 2 weeks ago with a better than  1:3 risk reward.

NZDUSD

This is my favoured commodity currency against the USD we are trading USD strength,but now not enough risk-reward so we wait to see how sentiment and the USD develop.

USDCAD

This I had on the short list if the FOMC disappointed and it has broken resistance…looking for follow through!

GBPUSD

Another pullback may now give a lower long entry

USDJPY

The JPY had gone a long way and not a place to consider buying…it looks different now…watching the bottom consolidation:

AUDJPY

This is a weekly break and needs some digestion and follow through…could be interesting if the risk environment deepens on the fear side.

The point of preparation is to be ready for the scenarios that present themselves. That is how we find the best opportunities. The other consideration is that we cannot assume conditions to last long term especially with shifting sentiment and such a heavy dependency on data.

March looks like it will be interesting and capable of producing some solid trading opportunities. There have been some important breaks as the charts above reveal and whether they are confirmed or prove to be fake-outs remains to be seen. Our job is not to guess but to continue to watch the signs and how they are digested and most importantly trade from the best and strongest areas that offer the best risk-reward.

I will be back in 10 days, so happy trading!

Judith Waker