Trading USDJPY Ahead of the Fed, Bearish Shark 4H
Hi all,
Today's analysis is neither a long or short, as it all comes down to a key event occurring in a few hours: the interest rate decision by the Fed.
Technicals:
That being said, there is a bearish shark harmonic pattern forming on the 4H time with a PRZ at 0.886. Here is the key information needed for this pattern:
PRZ formed from 2 ratios:
0B at 0.886 retracement (108.804),
AB at 1.618 projection (108.528)
Stop-loss is set at 1.13 0B projection (109.992)
Take profit is set at management and final levels, with management level at 0.5 BC retracement (106.618), and final level at 0.886 BC retracement (104.940)
The risk to reward is 1:3.18.
Other technicals to consider include two resistance trendlines. The purple-colored trendline is closer to the current level and has been formed and confirmed multiple times since the 21st of May. However, another level to consider is above, colored orange. This level has only been confirmed twice and has formed since the 30th of May.
Fundamentals:
Without a doubt, interest rates are one of the most important market-moving releases. However, this one is especially interesting and important given the unique trade situation surrounding the US currently.
Looking at the CME FedWatch Tool, 51.9% believe in a rate cut by 25 BP tomorrow while 48.1% believe in a hold. What this means to us is that a rate cut is something that is certainly not priced in, and as a result, a decision in either direction will result in a fast move either up or down in the pair.
Let's look at some reasons why the Fed may decide to hold rates this time after easing in the July meeting. One of the main reasons for the cut initially was inflation. However, the dormant inflation has seemed to move closer towards the Fed's 2 percent target since the cut, reducing the chance of a cut justified with inflation. Another focus previously was the trade war, but given that talks are set to begin again Thursday, previous tensions are slowly thawing, but of course, still very existent.
However, pressures also exist to encourage another rate cut. 50BP is certainly not a possibility, but a 25BP could be done again to protect the US against another set of unproductive talks between China and the US. Although the Fed is supposed to be politically independent, Trump's constant, and increasing, pressure on Powell to cut rates is another factor to consider.
Ultimately, I don't want to lean on either end. More important than the actual cut or hold will be Powell's statement. If Powell makes a statement that holds the US economy in high regard, chances for another further cut later will be played down. However, if Powell further emphasizes trade headwinds, inflation, or other risks, another cut is still very much in the picture. The market will no doubt react to a cut or hold, but given we are trading on a 4H timeframe, it will soon correct to focus on what exactly the next steps may be by the Fed. It is hence important to pay attention to Powell's statement and gauge the market reaction before making a decision.
How to trade this:
Just because there is a shark forming on the 4H doesn't mean you sell without reason. In a few hours, we may see price drop violently without confirming the PRZ or even shoot straight up past the stop-loss. Trading the USDJPY in the next few hours will depend solely on what the Fed's decision is, and Powell's statement giving clues for future steps.
Given that price just recently confirmed the purple resistance trendline, my current plan is to see what the Fed's decision is, and depending on the decision, enter a short position (ideal scenario given technicals discussed above), or see if the price breaks the higher resistance trendline (orange). If price breaks higher past the orange trendline, I will consider entering long. Breaking past the orange resistance trendline will also likely mean a break past the resistance zone (green), and also potentially enough momentum to break into the stop-loss of the shark pattern.
In summary, lots to consider here. But if you take one thing away from this, it's to make sure to be cautious ahead of the Fed's decision, as no matter how it ends up, we are certainly going to see some very reactive price to come.
Thanks for reading,
Kevin
Today's analysis is neither a long or short, as it all comes down to a key event occurring in a few hours: the interest rate decision by the Fed.
Technicals:
That being said, there is a bearish shark harmonic pattern forming on the 4H time with a PRZ at 0.886. Here is the key information needed for this pattern:
PRZ formed from 2 ratios:
0B at 0.886 retracement (108.804),
AB at 1.618 projection (108.528)
Stop-loss is set at 1.13 0B projection (109.992)
Take profit is set at management and final levels, with management level at 0.5 BC retracement (106.618), and final level at 0.886 BC retracement (104.940)
The risk to reward is 1:3.18.
Other technicals to consider include two resistance trendlines. The purple-colored trendline is closer to the current level and has been formed and confirmed multiple times since the 21st of May. However, another level to consider is above, colored orange. This level has only been confirmed twice and has formed since the 30th of May.
Fundamentals:
Without a doubt, interest rates are one of the most important market-moving releases. However, this one is especially interesting and important given the unique trade situation surrounding the US currently.
Looking at the CME FedWatch Tool, 51.9% believe in a rate cut by 25 BP tomorrow while 48.1% believe in a hold. What this means to us is that a rate cut is something that is certainly not priced in, and as a result, a decision in either direction will result in a fast move either up or down in the pair.
Let's look at some reasons why the Fed may decide to hold rates this time after easing in the July meeting. One of the main reasons for the cut initially was inflation. However, the dormant inflation has seemed to move closer towards the Fed's 2 percent target since the cut, reducing the chance of a cut justified with inflation. Another focus previously was the trade war, but given that talks are set to begin again Thursday, previous tensions are slowly thawing, but of course, still very existent.
However, pressures also exist to encourage another rate cut. 50BP is certainly not a possibility, but a 25BP could be done again to protect the US against another set of unproductive talks between China and the US. Although the Fed is supposed to be politically independent, Trump's constant, and increasing, pressure on Powell to cut rates is another factor to consider.
Ultimately, I don't want to lean on either end. More important than the actual cut or hold will be Powell's statement. If Powell makes a statement that holds the US economy in high regard, chances for another further cut later will be played down. However, if Powell further emphasizes trade headwinds, inflation, or other risks, another cut is still very much in the picture. The market will no doubt react to a cut or hold, but given we are trading on a 4H timeframe, it will soon correct to focus on what exactly the next steps may be by the Fed. It is hence important to pay attention to Powell's statement and gauge the market reaction before making a decision.
How to trade this:
Just because there is a shark forming on the 4H doesn't mean you sell without reason. In a few hours, we may see price drop violently without confirming the PRZ or even shoot straight up past the stop-loss. Trading the USDJPY in the next few hours will depend solely on what the Fed's decision is, and Powell's statement giving clues for future steps.
Given that price just recently confirmed the purple resistance trendline, my current plan is to see what the Fed's decision is, and depending on the decision, enter a short position (ideal scenario given technicals discussed above), or see if the price breaks the higher resistance trendline (orange). If price breaks higher past the orange trendline, I will consider entering long. Breaking past the orange resistance trendline will also likely mean a break past the resistance zone (green), and also potentially enough momentum to break into the stop-loss of the shark pattern.
In summary, lots to consider here. But if you take one thing away from this, it's to make sure to be cautious ahead of the Fed's decision, as no matter how it ends up, we are certainly going to see some very reactive price to come.
Thanks for reading,
Kevin
Trade active:
Fed cut rate by 25BP. It was either this or a hold. However, USD still rose in the daily given Powell's lack of direction for a future cut, making traders a bit more uneasy in terms of the confidence of another further cut next meeting.
This isn't necessarily good or bad. It just means that there is a greater chance that the pair may rise up towards our PRZ for the shark, and we may see a good short opportunity to come with the orange resistance trendline as well as the green resistance zone acting as confluence.
This isn't necessarily good or bad. It just means that there is a greater chance that the pair may rise up towards our PRZ for the shark, and we may see a good short opportunity to come with the orange resistance trendline as well as the green resistance zone acting as confluence.
Trade active:
For those who have not already entered, another opportunity is to come in a few hours. A trade can be based on the result of the PMI, which is an important indicator to watch as it can tell us whether manufacturing expanded or contracted. With the Fed divided on the next rate decision, this could give some insight into how manufacturing is doing amidst trade tensions as well as whether it has reacted well to the previous rate cut.
Trade active:
TAKE PROFIT 1 REACHED. Watching NFP and labor reports coming out soon to indicate future direction.
Trade closed: target reached:
I decided to close the entire position at the 0.50 management level. Too much uncertainty surrounding US politics as well as trade war negotiations.