A Strategy for Trading Fedspeak (specific focus on EUR/USD)

2015-11-12 13:43:00

Talking Points:

-After a holiday in the US, markets are primed and ready for volatility as numerous Fed speakers offer commentary today, and given the scope of rate expectations for December, each of these speeches has the potential to be market-moving.

- Of particular interest are speeches from noted doves Charles Evans and William Dudley. Should they take on a hawkish stance, this could further increase those expectations for a December hike.

- The US Dollar pulled back throughout the week after setting a new 12-year high after last Friday’s NFP report; but this could open up opportunity for trend-continuation strategies, with an especially attractive setup in EUR/USD.

1. Bring on the Fedspeak: US Markets were closed yesterday in observance of Veterans Day, and price action throughout the session very much resembled a holiday. Traders have numerous terms to describe this: ‘Choppy,’ ‘barbed wire,’ or ‘stick sandwich,’ to name a few, describing the price action (or lack thereof) that will often emanate on a holiday-impacted trading day. But today is different; for today, we shall hear from numerous Central Bank members that may or may not drop hints towards future policy moves. The big question mark at the center of the circle is the Federal Reserve and whether or not they’re actually going to hike in December. After Friday’s blowout NFP report on the heels of the hawkish October Fed statement, it appears as though this is likelihood. But after six years of fits and starts in economic data, matched with an extremely reticent Fed that’s backed away from tighter policy on numerous occasions, it may be hard to imagine that we’re actually going to get that first rate hike in over nine years.

Christopher Vecchio analyzed today’s schedule of Fedspeak, and makes an excellent point that the two Fed members to watch are Charles Evans and William Dudley. Both of these gentlemen are considered ‘doves,’ and should they signal that conditions are right for a rate hike, then this could be seen as a stronger probability for an actual move with even the dovish members of the Fed taking on a hawkish stance. Ms. Yellen speaks today, but this is merely opening remarks, so we’re not technically going to be hearing much from Chairwoman Yellen. Mr. Evans speaks at 10:15 AM ET, and Mr. Dudley follows at 12:15. Watch these speeches for cues to USD-moves. Mr. Bullard kicks the Fedpeak off at 9:05 AM, followed by Ms. Yellens opening remarks at 9:30. Jeffrey Lacker takes the mic at 9:45 AM, and then Mr. Evans and Dudley speak, followed by Fed Vice Chair Stanley Fischer at 6:00 PM this evening (all times Eastern).

Not coincidentally, the US Dollar is catching a bid as we move into the US session on the morning. A week and a half ago, we had discussed how traders could look to buy the Dollar in the article, Two Ways to Trade the Euro and the Dollar. This was when USD had just begun to test resistance within the symmetrical wedge formation that dominated price action in the Greenback for much of the year. Since then, the Dollar has smashed through multiple levels of resistance on its way to setting a new 12-year high. This lasted all the way into this week, when profit taking brought in a retracement to the up-trend; but with this loaded calendar of Fedspeak today, we’ve seen buyers jumping into USD since around 8 PM ET last night.

On the Daily chart below, you can see how we’re now catching support right around that prior 12-year high (resistance) of 12,162.

Continuation of the move outlined last week (click below for larger image)

Created with Marketscope/Trading Station II; prepared by James Stanley

2. Also contributing Central Bank commentary, we have Mr. Mario Draghi: And as many have expected, Mr. Draghi took a dovish tone, yet again, in discussing the ECB’s December meeting. This is very similar to last Tuesday, in which Euro sold off ahead of an expected dovish tone from the head of the ECB. Mr. Draghi mentioned that ‘downside risks are visible’ while also noting that those initial ‘green shoots’ of inflation that provided hope that the European economy was turning the corner have begun to weaken. This is about as dovish of a stance that we could get from Mr. Draghi in his morning remarks, and the Euro initially put in a ~60 pip move lower, but since has found support (and also a higher-low), as we near this onslaught of Fed speeches.

But this is part of a bigger-picture movement. This week, while the US Dollar has been pulling back after setting a fresh 12-year high, we've seen EUR/USD trade in a rather consistent range. So, while the US Dollar is selling off, the Euro is range bound; and this tells us something. Should USD-strength come back (which could certainly be triggered by today's Fedspeak), short EUR/USD could be a really attractive setup. Further, the fact that EUR/USD isn't moving higher while USD sells off shows us the prospect of continued weakness in the single currency (EUR). Below, we’re looking at two separate charts. The first is longer-term, and we’re looking at the recent bear flag break along with the near-term resistance coming in at 1.0757, which is the 76.4% Fibonacci retracement of this year’s major move (taking the March low to the August high in the pair). Notice how we’ve caught four consecutive days of resistance at this Fib level (and I’ve also left the notations on the chart from last Friday’s article, in which we instructed traders that potential resistance may be found at this level).

(click below for larger image)

Created with Marketscope/Trading Station II; prepared by James Stanley

And below, we’re looking at the 1-hour chart of EUR/USD, and I’ve left the small grey box indicating the range that was on the previous chart. Below, we’ll see much more granular price action, but you’ll notice the multiple tests of resistance around this Fib level at 1.0757.

This could be an attractive way of buying USD in anticipation of a trend-continuation move.

(click below for larger image)