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Monthly Review: July 2022 - US Fed Goes Big! Is the US in a Recession?

   

US Fed Goes Big (Again) with a 0.75% Interest Rate Rise. Is the US in a Recession?  The Big JPY Reversal?

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout August and beyond.

This time, the 0.75% Interest Rate hike by the US Federal Reserve was expected so we didn’t get much market reaction.  However, USD fell just afterwards.  Read why below.

US PCE data was better than expected driving USD higher temporarily.  This gave us a great “Counter-Trend” Trading opportunity.  Read below!

Valutrades clients may now trade the USD Index and we will devote a section to it here each month and you will see it often in our Market Blast videos Mondays and Tuesdays.  Stay tuned!

Even though the US has seen two consecutive quarters of lower GDP, are they in a recession?  The answer is, “Not yet”, but an official recession by year-end is on the cards.  This revelation has caused the USD to pause its bull run but many analysts and investors are still going long on the greenback.

JPY

Investors and analysts all over the financial world are debating whether the Japanese Yen bear run has ended.  Fundamentally, there is little reason to think that the great reversal has started but some experts say that it can’t get any worse.Screenshot 2022-08-01 at 17.16.48

The charts are trying to tell us a different story with price action on all major JPY pairs heading south.  We see USDJPY, GBPJPY, and NZDJPY at support.  AUDJPY and EURJPY are clearly starting downtrends but, from the technical side, we are waiting to see if price action can break the lower trend lines and levels of support before we can declare the JPY reversal.

Natural Gas

Completely contrary to last month’s report, the chart tells the story of Natural Gas prices rising all month with a dramatic drop during the last few days of the month.  Why?  Uncertainty over the supply of Natural Gas from Russia had again driven price action higher, combined with scheduled maintenance of the Nord Stream 1 pipeline.Screenshot 2022-08-01 at 16.37.50

Despite the fact that Russia may cut off supply to most of Europe, the threat of a recession is driving price action lower.  Also, Germany is legislating lower demand for gas by restricting its use, allowing for more supply going into winter.

Watch this space!

US Equities

Throughout the first half of the year, investors went off US equities in fear of rate hikes by the Fed.  Now that we have seen these rate hikes (actually more than the markets had priced in) we are looking at a serious rebound.  Screenshot 2022-08-01 at 16.34.54

Why?  Despite all the headwinds, corporate earnings reports are coming out better than analysts’ expectations, driving up most indices.  We can see from this NASDAQ D1 chart that the technicals are quite bullish.

However, buyer beware!  If we look at the NASDAQ W1 chart we see that the big picture looks quite bearish.  Personally, I would wait for a break of the upper trend line and perhaps a more bullish MACD.  To be super-cautious, you may want to wait for the next cycle of the Stochastic Oscillator.Screenshot 2022-08-01 at 16.29.37

Asian Equities

The Nikkei (JP225) behaved much like the US and European indices with strong growth in July.  However, other indices like the China A50 and Hong Kong’s Hang Seng have fallen all month due to China’s unworkable Zero-tolerance policy on COVID, and the crackdown on tech companies. Screenshot 2022-08-01 at 16.53.48

USD

Overall during July, USD ended up weaker with pairs like USDCAD, USDCHF, and GBPUSD ending up pretty much where they started the month, as we can see from these H4 charts.Screenshot 2022-08-01 at 15.46.58

However, we need to look at the bigger technical picture before assuming that the USD will be falling for the rest of the year.Screenshot 2022-08-01 at 15.51.47

The EURUSD D1 chart is clear with a downtrend likely to continue.  The European Central bank has been the slowest to react to global inflation issues and the threat of a complete Russia Natural Gas cut to Germany has many investors worried.Screenshot 2022-08-01 at 16.01.40

The GBPUSD D1 chart tells a similar story but price action is trying to break the upper trend line.  While UK inflation, and the economy in general, are not great stories. The Bank of England has been more progressive than others and, hopefully, the UK will be politically stable in September with Liz Truss taking over the helm.Screenshot 2022-08-01 at 16.07.43

USDCAD D1 may be the exception from now until the end of the year.  Technically, everything looks bearish with MACD just heading below zero.  The difference here is the impact that the price of crude oil has on the Loonie.  If Vladimir Putin does, in fact, cut off gas to Germany and its neighbours, we can expect an energy crisis with WTI and Brent heading higher, thereby pushing price action on CAD.

Keep an eye on the US Non-Farm Payrolls this week as the Fed will be using this as another gauge when assessing the strength of the US economy.Screenshot 2022-08-01 at 16.12.07

Valutrades clients can now trade the USD Index which represents a basket of USD pairs.  We can see that the USD started falling in mid-June and price action has formed a Falling Wedge (or am I seeing things?).  This may be a bullish pattern unless the upcoming candles break through the lower trend line.

GBP 

The charts are quite mixed with July’s results for the Pound Sterling with gains against EUR, USD, and CAD, but with mixed results against JPY, CHF, AUD, and NZD.Screenshot 2022-08-01 at 17.03.14

We are seeing a generally stronger GBP with the Bank of England looking at a 0.5% rise in interest rates and the potential of some political stability landing on the UK parliament in September.

Gold (XAUUSD) 

 Gold has been trending down for months now and July was no exception.Screenshot 2022-08-01 at 17.59.19

In the last week of the month, XAUUSD rebounded based on a weaker USD and geopolitical issues with Russian gas and Chinese threats around the visit of the US speaker of the house visiting Taiwan.

On the daily chart, keep an eye on the upper trend line and the Stochastic Oscillator which is quite overbought.

Counter-Trend Trading Opportunity 

 We are sure that you have heard us talking about the “Counter-Trend Trade” many times over the years.  In July we had the perfect opportunity and we hope that Valutrades clients spotted it and took advantage.Screenshot 2022-07-31 at 09.43.45

Referring to the chart above:

1. Price action on GBPUSD had been in a clear uptrend for the last half of July.  The higher lows and higher highs were obvious.  As good traders, we always want to trade with the trend.  The Trend is your Friend!

2. The remarks made in the FOMC press conference weakened the USD driving price action higher.  If you were already long on GBPUSD…nice one!

3. Good US Personal Consumption Expenditures (PCE) data drove price action lower, until it intersected with the lower trend line, giving us the perfect entry point to go long on GBPUSD.  As an added confirmation, the Stochastic Oscillator turned from Oversold at exactly the correct point.

To summarise, this is the type of trade that all traders should be investigating.  They occur a few times every month, and they require very little time to spot and analyse, but they require a bit of discipline, and you will need to pay attention to Economic news.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of August.

Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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