USD looks well bid (again) as we head to the Fed
Yesterday on my talk to the ACT course attendees I spoke about bias and how, at the early stages of planning a strategy, it's good to know the bias of a currency. It doesn't matter what you think of a country's fundamentals, whether the data is made up lies, whether the central bank members are crooks or whatever. The price action bias tells you the path of least resistance. That's a very big clue in the 50/50 choice on whether a currency goes up or down, and at the end of the day that's what we want to know, will it go up or down?
That bias helps give us an idea of risk. You potentially have less risk when you trade with the bias and higher risk when you go against it
What do we know about the US dollar?
We know that the bias is bullish so when we go to trade, even if we want to trade the other way, we know that the risk is that something comes out or happens that adds strength to that bias. We'll go higher and faster on bullish news than we would go lower on bearish
We've got that right now with the dollar and the Fed. Time after time after time the dollar has got itself all bullish into a Fed event only to be disappointed. What happens after the disappointment? I comes running back all over again when we get to the next event
But it won't keep doing it forever. It's the old blind squirrel cliché, that even a blind squirrel will find a nut now and again, and the same applies to the dollar. One day the buck will get it right and the Fed will deliver, and we're getting closer to the time when that will happen
What are we likely to get from the FOMC today and what's the best way to trade it?
There's two simple ways to look at it
- The Fed maintains their language as per prior meetings and the buck gets disappointed again
- The Fed gives a clear indication that September or December is the trigger data for hikes, and the dollar loves it
I don't really think the market will care for any of the finer details, it just wants to know when they're going to hike
From that we have two outcomes, the dollar falls or the dollar rises, and that's where we fall back on to our bias. If the buck falls we know it's going to pick itself right back up again and the expectation on Sep will be huge (unless the Fed rule it out in their language). So the easy trade is to buy any decent dip.
If they do prime Sep or Dec, unless you get in very quick, it's best to wait for the dust to settle as we'll need to see what happens to the topside. The market has been waiting and waiting and waiting for this and while we will get a rally, that potentially releases the pressure valve and the expectation bubble will pop. After everyone will be saying "what now?". In that situation longs will be thinking that the expectation trade is over and that it's time to take profit on that strategy. That increases the chances of seeing a huge 'buy the rumour sell the fact' situation. If you're long into that scenario then think about how much further upside you may or may not have
Trading is as simple or as complex as you want to make it but often just stepping back and looking at a simple approach can lead to the best trades
