Last week it was the ECB (European Central Bank) turn to move markets as the Thursday meeting indeed was one of a kind, in the sense that the central bank eased and markets reacted exactly in the opposite way. This week it was Federal Reserve of the United States (Fed) on Wednesday who was supposed to bring more clarity to markets and the outcome was a total shock for everyone and for the US dollar in particular.
The Fed hiked last time in December 2015 and while doing that, it signaled its willingness to hike four more times in 2016, and if that promise was to be hold, it meant that this past Wednesday we were supposed to see a rate hike. We did not. Not only that the Fed did not hike, but they slashed their view on the economy and they announced they are expecting now to make only two hikes this year.
Needless to say the USD was sold aggressively all over the board with basically every currency gaining against the USD. One of the most aggressive moves was on the USDCAD and USDJPY pairs as they were simply sinking without a bottom to be found. USDJPY dipped below 111 again while the USDCAD broke the all-important and pivotal 1.30 level and now anything is possible.
Coming back to the Fed, the press conference that followed was dovish as well and Yellen even mentioned the fact that the strength of the US dollar is a problem for the economy. With so specific words, it was difficult for the US dollar to bounce so if you happened to be on the wrong direction in these times, then it’s as bad as bad can be.
USDCAD Looking for Direction Ahead of the CPI
CPI is about to be released on Friday afternoon in Canada and we all know by now that inflation is the most important thing central banks are looking for. This CPI is expected to push up to 0.5% as oil moves towards the $40 level and therefore the deflationary threats are not that strong anymore.
Why end of month? Because we have only one and a half week now until end of March and we need to see what the CPI is bringing. Bank of Canada is closely watching this release as well and traders are aware of the fact that rates are actually moving based on how inflation is showing.
When it comes to USDCAD moves one should always consider what oil is doing as the Canadian economy is heavily dependent on the oil production. With brent trading above $40 now, perspectives are much brighter then when it was trading below $30.
Bank of England Kept Rates Steady
Following Fed’s lead, Bank of England kept rates unchanged and this did not meant GBP didn’t move. Oh it moved, and the move was aggressive. Firstly, the GBPUSD traveled to the upside on Wednesday evening on the back of the Fed being dovish and delivering a dovish message. Secondly, on Thursday when London opened, it jumped some more only to deal 1.4500 around the time Bank of England released its message.
It was a three hundred pips move, or three big figures to the upside with virtually no pullback and if you trade these kind of events, you need to have a bigger expiration date in mind. In our case, Miircea bought put options from the highs with end of month expiration date again as Brexit fears should still be there and weigh on the pound.
US Final GDP Next Week
Final GDP is expected to be released next Friday and the economic calendar doesn’t show any central bank meeting. It means we might have a calm week until Friday’s release and traders will try to position for the release during the week. Taking into account the fact that end of month is coming and flows are about to influence prices, it should be difficult to find the right direction. Our positioning will be into finding good places for buying call options on USDCAD while the bias on the EURUSD and GBPUSD pairs remains bearish, despite the fact that Fed did not deliver on its late 2015 promises.
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