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September 20, 2016

Trading signals 20.09.2016. Preparing for FOMC

Trading signals 20.09.2016. Preparing for FOMC

Hello Traders,

While traders all over the world are bracing for the rate hike decision due September 20-21 and BoJ Policy Statement on September 21, its important to take a look at preceding remarkable events which could be useful to follow market sentiment ahead of the Central Banks’ updates.

So on September 6 we got a surprise from Institute Supply Management with its monthly gauge of business activity in manufacturing and service sectors in the US. The institute reported that Non-Manufacturing PMI for August fell for the lowest level since 2010:

screen-shot-2016-09-20-at-9-54-13-am

A sharp drop in the service sector was a crushing blow for consumption-driven US economy, slashing chances for an early rate hike. Uncertainty sparked pushing gold up government bond yields down.

Later on September 8, the decision of ECB to not cut rates and leave asset-purchase program untouched signaled European Bank is done with easing for now taking wait-and-see stance. Such move put additional pressure on FED to delay rate increase as abrupt halting of stimulus from all Central Banks would be too painful for global equities which have been rallying on the rate cuts from Central Banks around the world.

Just look how the reaction of Gold, US and German gov. bonds to ECB:

screen-shot-2016-09-20-at-10-26-25-amscreen-shot-2016-09-20-at-10-27-07-amscreen-shot-2016-09-20-at-10-27-37-am

Government bonds also tumbled while their yield going up signaling investors expect no increase of borrowing costs from the FED in September.  The rally seen on global stocks, which have been enjoying lax monetary policies from the Central Banks till recent time, will be probably extended.

Nevertheless, latests data on Consumer Price Index which showed faster growth than projected instills confidence at least one rate increase will be done this year. The timeframe depends on how hawkish FED will be in its projections, but most probably it will take place in December. Futures on rate hike see more than 50% of Fed taking action in its last meeting in this year.

In the run-up to the FED meeting here is possible trading scenarios for gold and pound:

Latest decline on gold found too slack response from bulls despite an uncertainty around the coming event:

screen-shot-2016-09-20-at-11-40-40-am

The chart suggests that bearish force consolidates with potential break of $1300 level as investors expect extension of the period of “cheap dollar” till December meeting, getting out of safe heaven asset for higher yields.

Trading call on gold: Sell XAUUSD, target $1298.50, SL – $1320.50

GBPUSD

The pair has been declining for a third consecutive day reaching one-month low at 1.30. Tomorrow FOMC decision can potentially weaken the Dollar giving a perfect cause to the pair for a rapid bounce.

Trading call for GBPUSD: BUY at 1.2980, target 1.3250, SL – 1.2880

Its strongly recommended to observe conservative risk setup and avoid trading with high lots and tight Stop Loss as wide volatility is expected on the markets.

That’s it for today.

Leave your questions and comments in the box below.

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