It was our FX strategists final week of market discussions for 2023, focusing on the few major events that lined up the forex calendar ahead of the holiday season.
Overall, it was an arguably net effective week with 3 out of 3 directional biases playing out, but risk management was likely a big driver of outcomes given that some expected moves were well ahead / after targeted catalysts.
USD/JPY: Monday – Dec. 18, 2023
USD/JPY 1-Hour Forex Chart by TradingView
On Monday, our target catalyst was the upcoming Bank of Japan monetary policy statement, but our strategy focus was a bit different in that we didn’t mainly focus on the most likely outcome scenario.
While we did touch on what we thought was the most likely scenario (BOJ holds off on rate hike signal / JPY weakens), we thought that the low probability scenario of the BOJ signaling the end of negative rate policy would be a sea change and a massive market mover. We thought that it would be a good idea to have a strategy in mind if that scenario did develop as it would likely be a massive market mover for JPY.
Overall, our lean was bullish on JPY over USD (recent rate cut talks from FOMC continues to support bearish lean on Greenback), and we discussed two possible technical setups for the low probability scenario of early rate hike signals.
Well, as expected the BOJ statement came and they did not signal an end to the negative rate policy in December or potentially in January, prompting a yen selloff as touched on in the original discussion.
So, we didn’t get the outlier scenario and a massive bullish yen reaction, but the market did take USD/JPY to the technical area of interest where we said that were likely to see resistance if the BOJ signaled rate hikes. USD/JPY traded up to just under the 145.00 area before sellers took control (both technical players and fundie players still expected a BOJ hike in 2024).
In our opinion, this discussion was arguably effective towards a potential positive outcome. While the exact low probability scenario didn’t play out, our fundamentally short-term JPY weakness call played out right after the expected policy hold, our longer-term short bias on USD/JPY did develop as sellers did take back control at our targeted resistance area after the bounce.
And it’s likely, this discussion was most effective for those who risk managed a short position after the bounce, playing the developing monetary policy divergent outlook between the BOJ (potentially raising interest rates) vs. the Federal Reserves (potentially lowering rates in 2024).
GBP/AUD: Tuesday – Dec. 19, 2023
GBP/AUD 1-hour Forex Chart by TradingView
On Tuesday, we thought that the U.K. CPI update would be a market mover for Sterling, and based on expectations of a lower-than-previous inflation read, the odds favored the scenario where GBP traders would price in higher expectations of the Bank of England easing up on their hawkish stance down the road.
We matched this potential scenario up with the Australian dollar, which has been a net outperformer among the majors, and still had a relatively bullish lean due to the high inflation rates in Australia and the broad market risk-on environment that tends to support the Aussie.
With our bearish lean on GBP/AUD, we discussed both retracement and downside break scenarios to watchout for around the U.K. CPI update, and triggers to wait for before considering moving on to a short position risk management plan.
Not too long after our discussion, GBP/AUD sellers finally broke the strong support level at 1.8810, taking the pair lower ahead of the U.K. CPI event. On the Wednesday, the inflation data came and as expected, came in below expectations/previous reads, quickly bringing in Sterling sellers and prompting a 100 pip drop in GBP/AUD before stabilizing around 1.8675.
The pair went on to trend lower, eventually reaching our discussed target support area around 1.8650 – 1.8680, where generally held at the end of the week.
Given that the downside break scenario was ahead of the U.K. CPI event, individual risk management decisions were likely a big factor of effectiveness in this case.
Overall, though, the event scenario played out as expected, the market never traded back above the broken support level, and the target support area was reached, so we’d argue that this strategy discussion was effective at supporting a potentially positive outcome.
XAU/USD: Wednesday – Dec. 20, 2023
Gold (XAU/USD) 1-Hour Chart by TradingView
For our final strategy discussion of the week, we looked as Gold (XAU/USD) to play the highly anticipated U.S. Core PCE Price Index event. We thought that this event would be a market mover for the Greenback (and potentially broad markets), and with expectations of November metrics to come roughly inline to slightly lower than previous reads, we looked to be short-term short bias on USD and bond yields.
A weaker Greenback and lower bond yields tends to benefit gold, so we looked at long XAU/USD technical setups, in case the event outcome played out as expected.
Like GBP/AUD, the market in XAU/USD moved ahead of the target event, signaling traders were eager to price in the anticipated lower read. XAU/USD broke above the resistance area just under the $2,050 handle, trading up as high as $2,071 post event before traders started taking profits on the as-forecasted weaker read (3.2% y/y in November vs. 3.4% y/y in October).
In this discussion, our directional bias and long technical setup was on point, and given that the market never traded below our targeted break area, we’d argue that this was effective in supporting a potential positive risk management outcome. But traders priced in data expectations early on, giving individual risk management strategy decisions a little bit more weight as a factor in determining trading outcomes.
This is our last Play of the Day Recap for 2023!
With no major events scheduled for next week and the holidays likely taking traders away from their desks, we’re going to take a pause to reflect and see what we can do better when we come back in the first week of 2024!
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