Trading Strategy Webinar: Prices, USD, EUR/USD and Stocks – DailyFX | Omd Cialis

Trading strategy talking points:

  • This is a video from an archived webinar where I looked at numerous markets including forex markets such as US Dollars and EUR/USDand macroeconomic elements such as prices and how that might affect stocks.
  • Interest rates have been falling recently despite an inverted yield curve. I discussed this topic a little later in the webinar and what I think it means. Notably, interest rates rose sharply today after some comments from Fed officials. But so far, the stocks have not breached the support.
  • The analysis contained in the article is based on price action and chart formations. To learn more about price action or chart patterns visit our DailyFX education Section.
  • Quarterly forecasts have just been released by DailyFX and I have written the technical part of the US dollar forecast. To get the full report, click on the link below.

We are at an interesting point in the markets where there are two defined camps. The first camp is bullish as many think stocks have already bottomed out. This view also tends to include the expectation that rates have been beaten – and that the Fed may even be nearing the end of its rate-hike cycle. This page may reference Chairman Powell’s comments at the last FOMC interest rate decision regarding the fact that he believes we are now at neutral interest rates. And he also suggested that it would be an opportune time to return to a more data-dependent mode, again showing that perhaps the Fed thinks it has taken enough steps to start fighting inflation?

This camp can also refer to much of the past 13 years since the financial collapse in the Fed’s presented pattern in which economic distress has been rapidly offset by more and more adjustments. Case in point – not even a global pandemic could keep markets down as the liquidity engine burst into flames less than two months after Covid touched the US and the S&P 500 was already at a new all-time high a few months later.

The other camp still sees inflation at 9% and thinks that those in the first camp must be missing something, to put it politely. This camp also has about nine months of FOMC comments pointing to the importance of fighting inflation and, logically, the need to do so ahead of the midterm elections later this year. Americans often vote with their pocketbooks, and with so much inflationary fuss, it’s hard to imagine a positive outcome for the incumbent party, making for an awkward situation ahead of the 2024 general election.

So the question boils down to a two-pronged dilemma: how serious is the Fed about fighting inflation? Are they actually willing to lower the S&P 500 to say 3000 or maybe even 2500? And, more specifically, how badly will the rate hikes they’ve already made make a dent?

prices markets

It is important to note that the Fed does not control interest rate markets. They control the fed funds, but that’s ultra-short-term lending. This should logically feed into the yield curve so that when the Fed raises short-term rates, so do long-term rates, which carry higher risk for longer periods of time.

When that breaks down that something is wrong…

For much of this year, Treasury rates have tracked these rate hikes the fed in the general sense. As the Fed hiked rates, so did Treasury rates. Until the June rate decision, that is. The 10-year bond capped that 75bp hike with a 3.5% yield – and then continued a pullback through July’s rate hike through today.

Well, that’s important because that was one of the variables that helped boost stock prices, driven by those in the camp who thought the Fed might be close to completing its rate hikes? As yields have fallen since that rate decision in June, share prices have skyrocketed.

But that started to change today as the Fed is now past its blackout period and we are hearing from several Fed members like Mary Daly that the bank is “far from done”. We’ve also heard from Neel Kashkari and Charlie Evans, both noticed deaf people, but they spoke in a hawkish way, somewhat similar to Ms. Daly. In response, we see a large move in the 10-year range that is also showing a bullish engulfing pattern.

10-year interest rates in the US

Diagram created by JamesStanley; 10 year courses on Tradingview

Treasury curve

Unfortunately, this rise in yields has been patchy, with short-term yields seeing more movement today than longer-term yields. In other words, the yield curve is becoming more and more inverted, which is not a bullish sign.

In the webinar, I described in quite some detail why this happens.

The 2/10 yield curve is now the most inverted since September 2000 – even before the George W. Bush presidency.

US Treasuries 2/10 yield spread

simplest yield spread b/w 2 and 10

Diagram created by JamesStanley

USD

The biggest beneficiary of this in the forex space is the US dollar. I published one US dollar price action setups Installment payment this morning and I highlighted a USD at a key point of support after putting one in falling wedge patternwhich had taken the form of a bull flag.

Today’s rise in interest rates and in turn the USD has helped DXY to rally. It’s now at the key point of the test I highlighted earlier today, at 38.2% Fibonacci retracement a recent topside movement. A bullish break outside of the wedge keeps the door open for continuation in USD and there is a major pressure point on this issue which I will address below.

US dollar daily price chart

USD daily chart

Diagram created by JamesStanley; USD, DXY on trade view

EUR/USD Bearish Engulf

This daily bar is not ready yet, but it looks like it may close as a bearish engulf. If so, it could represent a potential change to EUR/USD’s otherwise dull story. During both the ECB’s 50 basis point hike and the Fed’s recent 75 basis point hike, EUR/USD remained in a square pattern.

That started to give way yesterday as the bulls forced its first close above 1.0233 in almost a month. But sellers have responded here and there bearish devour on the daily rate in the direction of the overall trend may reopen the door for bearish continuation strategies in EUR/USD and this could sync with the bullish strategies in USD reviewed above.

In my opinion, I would have preferred a deeper pullback. The 1.0340 level is a big level as this was the 19 year low for some time and even halted the sell-off for a few months before finally collapsing. Ideally, I would want to see this level tested as resistance before planning a parity retest and maybe even a break.

But this is price action. Respond or not, it doesn’t matter what I want.

EUR/USD daily chart

eurusd daily chart

Diagram created by JamesStanley; EUR USD on trade view

S&P500

The big question surrounding interest rates is – will stocks react?

Rising interest rates became a major concern for stocks in the first half of the year, and this led to a 25% decline in the S&P 500, which coincided with a 34% decline in the Nasdaq 100 (from the November 2021 high).

But since mid-June, around the FOMC rate decision and around when rates peaked, stocks have rocketed ever since.

There was a falling wedge formation in the S&P 500 that was often followed with bullish reversal targets. And it reversed when prices broke out a few weeks ago and continued to bounce to new higher highs.

price action has started to falter – and we are now starting to see inside bars on the four-hour chart, showing some potential for short-term shifts. As I wrote in this week’s technical forecast, there is more resistance around the 4200 level so if this trend continues there is one more point for sellers to watch. But short-term, the Fibonacci level at 4085 held support again on Friday and today – a break below that opens the door for a deeper pullback that will bring the 4000-4016 zone back into the equation.

If sellers are able to push back below the 4k psychological level, the bears have a bit more work to do and that could signal the return of the uptrend. It’s early days, but given the current backdrop, there’s potential.

S&P 500 daily chart

spx daily chart

Diagram created by JamesStanley; S&P 500 on trading view

— Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX education

Contact and follow James on Twitter: @JStanleyFX

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