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Play of the Day Recaps: October 23 – 27, 2023

Geopolitical drivers were still driving price action but a heavy week of top tier catalysts took some attention away and required our strategists to be more strict with triggers and biases based on scenarios.

Overall, we argue that at least half of our strategy discussions were effective, but how well a trader was able to watch news flow and adapt their risk management plans to that was likely more of a factor in outcomes this week.

EUR/CHF 2-Hour Forex Chart by TradingView

EUR/CHF 2-Hour Forex Chart by TradingView

On Monday, we started the week once again with EUR/CHF, and like last week, we were leaning bearish on the pair. This time it was on a potential scenario of Euro area data weakness ahead, the ECB signaling a peak in rate hikes, and the possibility of rising geopolitical risks which have fueled CHF strength recently.

We also touched on a scenario where if there were positive geopolitical developments and price action breaks sustainably above the 100 SMA indicators, that may be enough to shift directional sentiment short-term.

Following our post, the pair bounced higher on calmer geopolitical developments. While there was no stop to the conflict, a major ground invasion was postponed and humanitarian aid was allowed into the conflict zone.

But the bears pounced on EUR/CHF quickly after another round of weaker-than-expected flash PMIs from the Euro area, prompting a swift move from the R1 pivot area to the pivot point.

The final catalyst for the pair was on Thursday, when the European Central Bank gave their latest monetary policy statement, signaling that they were still in inflation fighting mode while holding the main policy rate at 4.50%.

But then, the Swiss franc saw broad weakness to close out the week, this is despite a swift rise in geopolitical fears as Israel signaled that they will move forward with increased ground operations.

Our best guess is that this may have been positioning influenced, as traders may have been taking some CHF long profits on the table. Let’s keep in mind that the Swiss franc is the best performing major currency in October, fueled by the start of the Israel-Hamas war, so some traders who think the war premium may fade a bit as the initial stages of the conflict are past us and world leaders work to end the conflict. Whatever the case may be, EUR/CHF rallied higher into the weekend.

The probable outcome of this strategy was likely highly depends on risk management execution. For those who waited to see the weak flash PMIs first from the Euro area before leaning short, they likely saw a positive outcome if they took profits quickly at the Pivot point, or after the more hawkish than expected ECB statement.

For those who ignored the fundamentals at the end of the week, it’s likely they’re in a negative situation, or if good risk management was practiced, have a small loss if  closed at the end of the week.

EUR/USD 2-Hour Forex Chart by TradingView

EUR/USD 2-Hour Forex Chart by TradingView

On Tuesday, we stayed focused on the euro after a set of weak Euro area PMIs and discussed a potential move lower in EUR/USD after the pair was rejected at a technical level of interest.

We didn’t have a directional lean, but we discussed the possibility of the pair moving lower and where it may find support if certain fundamental scenarios played out, specifically a shift to “pro-risk, anti-USD.”

But we also discussed a scenario where if we got disappointing U.S. PMIs (or if bond yields rallied again), an “anti-risk, pro-USD” environment may develop, which may push the pair lower.

Since our post, U.S. PMIs surprise positive (likely draw in fundie USD bulls), bond yields rose (as traders priced in higher odds of the Fed having room to keep interest rates higher for longer), and the ECB was a bit more hawkish than expected.

While our projected fundamental scenario didn’t play out as discussed, there was enough to drive EUR/USD lower after the bears rejected the bulls at the R1 pivot area.

We think that makes this strategy discussed likely effective with a likely positive outcome for those who risk managed a short play with the fundamental drivers. Even those who waited for the outcome of the U.S. PMIs still likely saw a decent positive outcome.

EUR/USD fell quickly after U.S. PMIs through the next session to the S1 Pivot support area before buyers stepped in, with the bulls likely getting help from the ECB not yet signaling a peak to the rate hike cycle.

AUD/CAD 1-Hour Forex Chart by TradingView

AUD/CAD 1-Hour Forex Chart by TradingView

AUD/CAD hits the top of the watchlist on Wednesday, and we were feeling bullish on the pair after a surprise positive inflation read from Australia and bullish price momentum in AUD.

On top of a possible positive AUD environment ahead, we were aware of the upcoming monetary policy statement from the Bank of Canada to spark big volatility for the Loonie.  We actually leaned bearish on CAD as recent data has pointed to a likely scenario of the BOC not only holding interest rates 5.00%, but also note weakening economic conditions.

Basically we said that, “if traders continue to price in a hawkish RBA and a not-so-hawkish BOC, then AUD/CAD may extend its weekly upswing and revisit its previous highs near .8800.”

Our strategy was to wait for a pullback and retest of the 0.8710 – 0.8750 area and see if buying interest develops before considering a long risk management position.

After our discussion, the BOC held and cited economic risks for Canada, but AUD/CAD fell strongly, more likely on broad AUD weakness. There doesn’t seem to be a direct catalyst for that behavior, but we guess that geopolitical risks weighed heavy on broad risk sentiment, outweighing strong Aussie inflation & a less hawkish BOC statement.

But the table turned for Aussie traders in the latter half of the week, correlating to more hot inflation updates from Australia. We can see the turn in sentiment on the AUD/CAD chart above, rallying hard to eventually reach the 0.8800 target discussed.

Event though the price action didn’t react as expected, our fundamental leans played out as expected and price eventually moved in our directional favor. It’s highly likely this strategy discussion resulted in a positive outcome, but it would depend on how risk management was executed, specifically if there was enough room accounted for the increase in volatility to weather that move lower on Wednesday.

CHF/JPY 1-Hour Chart by TradingView

CHF/JPY 1-Hour Forex Chart by TradingView

Finally, on Thursday we spotted a potential opportunity to play the very strong uptrend in CHF/JPY. The European Central Bank’s monetary policy statement was just ahead with expectations of them holding the main rate at 4.50% and given the weak business sentiment data, a potential peak rate hike signal. We thought that this could prompt euro flows into the Swiss franc (safe haven behavior).

As for the yen, we thought that the price action in USD/JPY would influence all yen pairs as the world watched on whether or not it would sustain a break above above the closely watched 150.00 handle (the perceived “intervention line”).

If these scenarios played out and support formed around the 167.00 – 167.50 area (or a clear breakout above its trend line resistance), then the odds rise of the pair moving up to the 168.50 or the 169.00 area of interest.

We also discussed the scenario of downside break of the 167.00 – 167.50 area of interest, a likely scenario if USD/JPY reversed back below 150.00, which may draw in momentum technical traders and take the pair to trade below the 1-hour chart’s Pivot Point (167.12) or 200 SMA levels.

After discussion on Thursday, the ECB event didn’t seem to spark a bullish direction reaction in the Swiss franc as it was more hawkish than expected (likely not sparking the flow from euros to francs as expected). Support did form on CHF/JPY, but our fundamental trigger of a dovish ECB didn’t materialize so that was not a strong bull setup.

Then the yen actually caught a big bid, correlating with a strong inflation read from Japan, and likely with the help of elevated geopolitical risks after Israel announced increased ground operations into Gaza during the morning London session on Friday.

The fundamentals fell inline with the bearish bias and was likely a positive outcome for those who were able to watch price action in USD/JPY and the news flow as the bear triggers scenarios did play out.

For those who saw those conditions play out and risk managed a short position after the support break, likely caught the strong move lower the S1 Pivot support area (more than 1 daily ATR from the support break).

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