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What you need to know before the FOMC meeting

On June 17th the US central bank, the Federal Reserve, will announce its latest decision on interest rates. Earlier this year, some in the market had expected the Fed to hike in June, however, market expectations have shifted back, and the first rate hike is now expected in December.

gbpusd weekly

Although the Fed may not make any changes at this meeting, the market will be extremely interested in what Fed chairwoman Janet Yellen has to say. Below are three things we are watching out for:

  • The Fed may hint at the potential timing for the first rate hike. If they sound dovish then the market could push back expectations to the first quarter of 2016, if they sound hawkish then a September rate rise could come back into focus.
  • Is the Fed still willing to hike rates even though Q1 GDP fell into negative territory and inflation pressure remains weak?
  • Does the Fed think that the market is being too cautious in only expecting 100 basis points of increases, approx. four interest rate hikes, over the next 18 months?

This information could have a major impact on the financial markets. For 6 years interest rates in US have been at 0%, one rate hike, even if it is small, could weaken risk sentiment as the market tries to adjust to a new normal where interest rates are expected to be higher in the future.

The Fed and risk sentiment:

Traditionally, when interest rates rise this causes the dollar to rise, Treasury yields to rise, and stocks to sell off, so if the Fed hints at a timetable for interest rate increases at this meeting then expect market volatility to rise. Below we take a look at the potential impact on gold and oil.

Gold: the yellow metal has had a tough 2015 so far, and is fast approaching the base of its recent range at $1,170. If the Federal Reserve reveals its rate-hiking strategy at this meeting then we may see gold break below key support at $1,150, then $1,132 – the low from July 2014. Typically when interest rates rise in the US this pushes up the dollar, since gold is priced in dollars this can weigh on the price of the precious metal. Thus, the second half of 2015 may be a struggle for gold bulls.

Oil: commodities tend to fall when the dollar rises, so if the Fed sounds hawkish at its June meeting this could hurt the oil price. After last year’s dramatic fall in the oil price, it has been trading in a fairly tight range in recent months. Brent crude has traded between $50 and $60 per barrel since April. If the Fed hints that a September rate hike is on the cards, then we could see oil gains capped for the next few months, with $60 a significant level of resistance. On the downside, the low of the last 12 months at $45.19 for Brent, may act as solid support.

Conclusion:

Although the Fed is not expected to actually hike rates at this meeting, the market will be analysing every word spoken by Fed chairwoman Janet Yellen in case she hints at a timetable for raising rates. We expect this meeting to generate market volatility, and due to the commodity market’s sensitivity to changes in value of the US dollar, expect a strong dollar to weigh heavily on the price of gold and oil in the coming weeks.

By: City Index analysts

Following the Pitchfork – GBPNZD 20 min

When the GBPNZD 20 min price started to edge above previous highs I started to note a possible change in trend or behaviour and looked to track this by means of a pitchfork.

Chart 1 shows how I tried to do this by initially identifying three swing lows and highs – marked A,B and C – with which to anchor my pitchfork. Having drawn it I then started to look for confirmation that I was indeed defining or following the path of price by means of this fork. I look for how price moves along the fork and whether it repeatedly touches lines drawn along this angle.

Chart 1:

GBPNZD 20 min Following the Pitchfork

In this instance the red circles show a sloppy response at the Lower Parallel and the Median Line and even though price tracks along the Lower Parallel for a couple of days, the touches were not precise enough to enamour the fork to me. It was therefore not a surprise when price dipped beneath the Lower Parallel and moved away from the line of the fork at the red arrow.

I therefore adjusted the fork, using the same three pivots, to a Modified Schiff as shown in Chart 2. In such a pitchfork the A is moved 50% towards the B in terms of price and time. Using this fork it can be seen that the reactions of price to the lines drawn was much more precise – the red circles show exact touches on the Upper and Lower Parallels and gave me confidence that the fork was indeed defining the correct path of price.

Chart 2:

GBPNZD 20 min Following the Pitchfork 2

Having established this confidence it would then be possible to look to the pitchfork to provide high-probability, low-risk trades in the vehicle. One such trade would have been to get long at the double-tap on the Lower Parallel as shown in the green circle. A long taken at the second touch at 1.9995 could have been protected with a 10 point stop beneath the low of the first touch. The stop would have been moved to breakeven as price moved away from the entry,

As price pushed above the Median Line it spiked higher and fell back – we would take note of this move and draw a dotted Sliding Parallel from previous resistance to mark this. This Sliding Parallel could only have been drawn after a second reaction to it as before that there would be no evidence that it existed. Having drawn it, the long trade could have been closed on a return to the Sliding Parallel resistance at the red arrow in the region of 2.0280.

By adjusting the pitchfork when needed we were able to correctly define the path of price and to use the lines of the fork to take a low-risk, high probability trade – I will continue to monitor the pitchfork and look for additional trades….

Addendum: Since posting the above, there has been a very good example of the way that we can use the proven supports and resistances given by the pitchfork to enter a profitable trade. Chart 3 shows an entry along proven support at the third green circled Quartile touch at 2.0170 with a ten point stop which could have been closed at the blue circle along confirmed Sliding Parallel resistance at 2.0325.

Chart 3:

gn20 2

If you would like to find out more about our analysis or services please follow the link:
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The following link will take you to a recent webinar looking at non-dollar pairs:
http://www.coghlancapital.com/node/7723

As Above, So Below – AUDNZD 60 min

I have been following this AUDNZD 60 min chart for some time – it shows a Modified Schiff pitchfork (where the origin is moved 50% in both time and price from the A towards the B) and dates from Early December. What I am looking for is some sort of indication that the fork is valid ie that we have correctly defined the all-important path of price.

asabovesobelow AUDNZD 60

Initially things did not look too promising as price meandered above the line of the Upper Parallel before spiking and retracing much of the move. It was only when there was a precise double-tap on the Median Line (in the second blue circle) that I started to get interested. The fork was still not validated as the touch could have been a coincidence but I drew a Sliding Parallel from the spike high in the first blue circle and watched to see what happened. When price meandered once more above the Upper Parallel and then spiked to resistance at the very same Sliding Parallel in the third blue circle I was happy to say that the fork was validated.

Very aggressive traders could have taken a short on a second touch of this Sliding Parallel at 1.0859 with a stop behind the first touch above 1.0862. This could then have been exited at prior support at the Median Line at 1.0709.

Price continued to fall and the Median Line that had been support became resistance – or to be precise the green Sliding Parallel just above the Median Line became resistance. This crossover from support to resistance also shows the path of price “stepping down” – from running in a channel between the Sliding Parallel resistance and the Median Line support it stepped down so that a new channel formed with the Median Line becoming resistance and another parallel line became the support.

And this support was found along the Sliding Parallel, marked with green circles, just beneath the Lower Parallel. Price has since moved between this Sliding Parallel support and the Sliding Parallel resistance noted above. Consistent moves are ones which can be traded eg a short at the green Sliding Parallel could have been taken today at 1.0644 with a stop behind the previous high of 1.0649. Price has dropped away from this entry and stop would have been moved to breakeven.

One other thing of note in this pitchfork is the “equivalence” or balance to be found around the Median Line. Note how the distance between the Upper Parallel and the blue circled Sliding Parallel is virtually identical to that between the Lower Parallel and the green circled Sliding Parallel.

I will continue to watch as this pitchfork shows the weakening and strengthening of trend along the defined path of price…..

If you would like to find out more about our analysis or services please follow the link:
https://www.coghlancapital.com/signup

The following link will take you to a recent webinar looking at non-dollar pairs:
http://www.coghlancapital.com/node/7723