Play of the Day Recaps: January 16 – 18, 2023

It was another busy week for FX traders with inflation updates and plenty of central bank catalysts on the calendar, creating a challenging environment.

So our strategists focused mainly on shorter-term ideas, which we’d argue was net supportive in leading to positive outcomes.

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On Tuesday, we focused on GBP/USD after the U.K. had just reported net weaker employment data, most notably a larger than expected fall in the wage growth rate and large rise in jobless claimants. This prompted us to lean bearish on Sterling, which we paired with the Greenback given the shift in rate cut expectations and its recent bullish price trend.

Now, we were cautious with our short bias given the busy calendar for both currencies, suggesting to watch for sustained trade below the broken trendline before it likely drew in more sellers. And if so, it could draw in sellers to push the pair to the “previous areas of interest like the S2 (1.2620) Pivot Point line or the 1.2600 area of interest.”

That’s essentially how the price played out as sellers held control through the rest of the session. We even saw a bounce in the following U.S. session, which immediately drew in sellers on GBP/USD, arguably on both U.K. data and comments from FOMC member Christopher Waller, which the markets took as the Fed being less aggressive on rate cuts this year.

GBP/USD eventually hit the 1.2800 support target area, right before jumping higher on surprisingly strong U.K. inflation updates.

We’d argue that this discussion was supportive in leading to a positive outcome, given that our directional bias and target selection played out as expected.

But as always, a trader’s risk management approach would have been a large factor in this case.

For those who shorted and took profit ahead of the U.K. CPI data, it’s highly likely a positive outcome was the result, especially for those who took the short on the bounce at better prices.

For those who took a swing approach (wider stops and targets) and didn’t adapt to when the U.K. printed strong inflation data (i.e., reduce risk/take profits), it’s highly likely a negative outcome was the result as the U.K. inflation data made a strong case for the Bank of England to not cut rates just yet.

On Wednesday, AUD/CAD made it to the top of the watchlist after data misses from China likely drew in some Aussie sellers, while stabilizing oil prices and Canada’s stronger than expected inflation update was had good odds of drawing in CAD buyers this week.

The pair had already made a large move lower after breaking below a consolidation range, so we discussed a couple of scenarios for both aggressive (sustained downside break) and conservative minded (bounce  > resistance reversal) strategists to keep a watch on before considering a risk management plan.

Both strategy discussions actually played out as AUD/CAD broke below the target break around (.8850 minor psychological area) and reached the top of our target area (.8800 – .8820) before buyers took back control.

And what is interesting is that even a very weak Australia employment update couldn’t keep sellers in control, as the pair continued to bounce well into the Friday session, suggesting profit taking on that earlier swing move lower was probably the main driver on Thursday and Friday.

So, the second rebound scenario played out, and the market got as high as .8889 before sellers jumped back in and pushed the paid lower strongly, despite a weak Canadian retail sales update, suggesting oil’s rally in the latter have of the week was the big driver for AUD/CAD weakness on Friday.

We’d argue that this discussion was net effective at leading towards positive outcomes. The aggressive price strategy of downside break and dip to the target .8800 – .8820 support area generally played out, and the scenario of a bounce to potential resistance played out as well, although the market didn’t get all the way up to the .8900 handle.

Of course, risk management practices were likely a factor as the entry strategy used would have played a big role in the outcome. For the aggressive strategy, a trader could have chosen to short at market or have been patient by waiting for a bounce, which would have yielded a wide difference in results.

On the conservative bounce-resistance strategy, a trader could have missed that move back lower if they were pretty strict on waiting for a move all the way up to the .8900 handle.

Finally on Thursday, we jumped back in focus on the U.S. dollar as the U.S. was set to print a stream of mid-tier economic updates.

It was a simple discussion where if the U.S. gave us net positive updates, we leaned bullish on the Greenback against the yen, a currency that has been in decline as traders have been parring back speculation of an end to the Bank of Japan’s negative interest rate policy.

For that potential scenario, we discuss a potential move up to the 148.50 weekly highs area. We also discussed a possible pullback scenario to consider, and potential support area to watch that could draw in buyers into the longer fundamental and price uptrend.

Well, the U.S. did print an arguably net positive round of updates, most notably a big fall in initial jobless claims data. This sparked an immediate rally, which was short lived as USD/JPY pulled back within the hour and falling below the pre-release prices to the Pivot Point.

This turned out to be a move that drew in buyers at the pivot point, leading to a steady rally higher going into the Friday Asia session.  And it was there that we really saw the pair shoot higher, a move that correlated with weaker than expected Japanese National core CPI update, so it’s likely that was the driver there.

This prompted a move to not only the target previous swing highs, but the R1 pivot resistance area before sellers took back control and pushed the pair swiftly lower during the London trading session.

Overall, because our expectation of USD/JPY rallying on net positive U.S. data played out, our target areas were reached, and the pair generally traded above our target entry area for most of the time, we’d argue this strategy discussion was net effective in leading to a positive outcome.

But even with this strategy discussion effectively anticipating price, risk and trade management was likely a factor on the a trader’s outcome. For those who took profits at targets (and/or rolled up stops as USD/JPY moved higher), they likely saw positive outcomes on the session.

For those who didn’t manage in that way and rode the pair through the rest of the week, potentially saw lower positive outcomes, or even a break even outcome. And again, the market never really traded below the pre-U.S. event releases, so a negative outcome was highly unlikely depending on the trade entry strategy used.

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