A Traders’ Week Ahead Playbook – The USD melting lower into Jackson Hole

We look ahead at the new trading week and the risk events that could influence sentiment, flow, and price action. We see that company earnings are still a factor, notably in Australia, but with a lack of heavyweight market cap names due to reports, the effects on the respective equity indices should be less impactful. Economic data rests on PMIs in the US, Europe, and the UK, while Fed Chair Powell's speech at Jackson Hole will be closely monitored.

We can see in various measures of short-term FX and equity volatility readings have pulled lower, and this is likely a reflection that options traders and market makers see the event risks this week failing to set off big movement. One could argue the lower volatility dynamic and limited risk events could spell a period of consolidation in equity indices and reduces the risk of further USD selling.

Jay Powell to signal a 25bp rate cut is coming

Fed Chair Powell’s speech will be seen as the marquee event risk and will play an important role in the Fed’s communication policy and commitment to limit any shock factor when it comes to altering policy. However, despite the strong focus from market players and the high probability that Powell will signal that rate cuts are coming, I am sceptical that it will be overly impactful on markets.

A 25bp cut in the September FOMC meeting is more than fully discounted into US interest rate swaps pricing, and while Powell will likely offer a hearty dose of optionality, unless we hear Powell hint that the Fed are not ready to ease, or that the tone is skewed towards a 50bp cut, then what we hear should marry almost perfectly to market pricing.

The DNC set to further lift Kamala Harris’s prospects

Many this week will increase their focus on the US election news cycle, with the Democratic National Convention (DNC) taking place on Monday through to Wednesday. The convention shouldn’t offer any actionable signal to traders, even if scenes of unity could further lift Harris’s odds of winning the electoral college vote on 5 November. It still feels early to express tactical US election trades, and while there is a view that traders will look to increase their sensitivity to the polling after Labor Day (2 Sept), it will not be until after the second live debate on 10 Sept that the market will start to ramp up capital allocated to election trades.

In the lead-up to Powell’s speech, cross-market price action will take some steer from the July FOMC minutes, where we’ll learn more about the number of Fed voters who called for a rate cut in the July FOMC meeting. We get also get the minutes from the recent ECB and RBA meetings, although neither should be overly market-moving and if holding EUR positions, I’d argue Eurozone PMIs (Thursday 18:00 AEST) could be the bigger drive of EUR volatility.

On this point of volatility (vol), EURUSD's 1-week implied options vol has pulled back from around 8% to 4.9% and below the YTD average of 5.76%. A 4.9% level of vol implies a move over the week in a EURUSD of -/+66-pips – which, therefore, projects a weekly range of 1.1090 to 1.0964 (from Friday's closing level).

The options market can be very useful as a guide on the level of risk traders take in a position – if the implied moves are lower, it can suggest trading with tighter stops than were deployed in the past two weeks, where, in turn, traders could look to increase position sizes accordingly.

EURUSD closed at the second-highest closing level of the year and after finding strong buyers into the dip towards 1.0950 last week, the pair now looks to build on the move through 1.1000. On the week I am biased to short EURUSD positions into 1.1070, especially given the pair is starting to look rich relative to EUR-US interest rate differentials. Clients are not waiting for higher levels and are actively fading the rally.

GBPUSD closed the week on its high print and has strong momentum going into the new week. The bulls will be eyeing the 1.3000 level, as they will the 17 July highs of 1.3044. Volatility markets suggest a break of 1.3044 through the week is a 12% probability. On the UK data front, we get UK PMIs (Thursday), while BoE gov Bailey is also due to speak at Jackson Hole on Friday.

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USDJPY – weekly

USDJPY broke the five-day consolidation on Thursday and was threatening to push towards ￥152, but the sellers spoilt the party on Friday, with price reversing and undoing much of the US retail sales-inspired spike. Those positioned short will want to see a break of Thursday's low of ￥147.05, with ￥146.07 also offering minor support. The USDJPY weekly chart portrays significant support below ￥146.48, so should the pair close the week below here it would sharply increase the probability of a re-test of ￥142.00.

Japan’s July CPI print (Friday 09:30 AEST) may result in a small impact on the JPY, although given market expectations for further BoJ hikes have been pared back, we may need to see a sizeable beat/miss to the consensus of 2.7% to get the JPY moving. BoJ gov Ueda is also due to meet with Japan’s parliament on Friday, where the central focus will be rate hikes.

Gold breaks out to new highs

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With the USD index (DXY) closing at the second weakest closing level of the year, gold is clearly a beneficiary of a weaker USD. Traders are also seeing signs that China could once again be adding tailwinds to the yellow metal, with news circulating that Chinese banks have been given new import quotas. GLD ETF inflows are also something I’m closely monitoring, where on Friday we saw the third highest inflows into the GLD ETF of 2024, and clearly further inflows into the ETF could be a big kicker for the gold bulls.

We’ve seen strong activity from clients to trade the move above $2500, but the obvious question here, given the range break to new highs, is whether to chase the upside or whether we see sellers push the price back into the former trading range. I favour playing momentum and placing buy-stop orders above $2510, in the hope that the strong form continues, where a body in motion stays in motion.

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Good luck to all.

h/t Michael Brown for the Week ahead calendar graphic

Pepperstone #trading #gold