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Readying Trade Setups for Risk Trends and Rate Forecasts

Readying Trade Setups for Risk Trends and Rate Forecasts

John Kicklighter, Chief Strategist

The imminent risk/potential of a risk break has eased to start the week, but we have great rate speculation opportunity for Euro, Pound and Dollar pairs with key event risk over the next 24 hours.

Before discussing the rate speculation volatility ahead, it is important to say that one eye should be kept on risk trends going forward. While the very immediate term may not carry as strong an opportunity from yen crosses breaking lower or the dollar realigning to the theme after monday's advance, the medium-term view for sentiment is showing more progress towards a systemic shift.

Keeping risk themes in mind, if there were an unexpected shock of fear and equity indexes dove alongside carry, emerging market, leverage and other exposures; my attention in FX would first fall upon the yen crosses. EURJPY below 139, GBPJPY below 169 and USDJPY below 101 remain favorites. Other opportunities can follow depending on the severity of the risk drive, but these would likely gain traction first.

If there is a stabilization for risk trends through the rest of the week - though it is may not last next week and beyond - these same pairs might leverage short-term range plays. I'll be watching USDJPY over the next 24 hours with the release of the CPI data. Rate expectations for the US are particularly important for the greenback. A break above 102.25 should rate forecast soar (and risk hold steady) would be particularly encouraging. EURUSD would be another opportunity under that scenario but the opportunity below 1.3800 could burn out quickly as there is a much larger support level down at 1.3650.

GBPUSD may be the most at-risk pair for volatility out there. Both UK and US CPI data are do and both currencies are particularly sensitive to rate forecast. Between the two figures, there is more potential in the UK data. If BoE rate forecasts ease, I will consider cable below 1.6675, but the real line in the sand is 1.6550. If the data is robust, a short-term GBPJPY break and range move above 170.75 is preferable.

For my existing positions, my long-term USDCHF long benefits from the Euro's stimulus threat. My long-term AUDNZD long is awaiting follow through above 1.09. The GBPAUD short is still playing out that H&S break, but it is exposed to the UK CPI. The EURAUD short is also still following out its track.

Market conditions change, and our strategy should reflect those changes. We have coded the DailyFX-Plus strategies for Breakout, Range and Momentum to adapt to these market shifts.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.