Table of Contents

• USD Analysis

• YEN

• EURO

• GBP

USD Analysis

Background & context

The main driver behind the dollar is the central bank (The FED). The FED has been fighting to control high levels of inflation since 2022. The way they do this is by increasing interest rates. Now the FED has stopped increasing interest rates indefinitely and is keeping an eye on when to start cutting the rates.

The FED will gauge economic data to see when it is appropriate to start cutting rates. If data becomes too weak, they will announce rate cuts sooner. If data such as economic data and inflationary data is still strong, we might see dollar ranging.

So, our objective is to keep an eye on economic data as it directly correlates with rate cuts and thus when to short the dollar.

The question is: “how long is the FED going to keep interest rates at elevated levels?”

Macro – Fundamental understanding

High interest rates —> Dollar bullish
Low interest rates —> Dollar bearish
Expectations of rate hikes —> Dollar bullish
Expectations of rate cuts —> Dollar bearish
Strong economic data —> Dollar bullish
Weak economic data —> Dollar bearish

The week ahead

• Last week, we had the Minutes from the December FOMC meeting confirming that rate hikes were “likely at or near its peak” but showed no meaningful discussion on rate cuts.

• Also, NFP was better-than-expected with 216k jobs compared to 168k in December, but downward revisions to the prior two months kept a cooling trend intact. The unemployment rate held steady at 3.7%, while wage growth accelerated slightly.
  

Both facts are dollar bullish as it shows that the economy is still too strong in the face of rate hikes. This gives off the vibe that rate cuts may be delayed. Which is dollar bullish as high interest rates means that more investors will buy the dollars to benefit from a higher ROI.

With this in mind, at some point last week, investors were nearly fully convinced that a 25bps cut will be delivered in March and that interest rates should be lowered by 160bps by December.

Now that number stands at around 140 and the probability of a March cut is down to around 70%.

However, this is from a single economic event. We will need a string of events going in the same direction to solidify a bias. The broader bias of dollar bears is still intact as it is known that rates will be cut. Just a question of when.

If rates stay unchanged at these high levels, we would be dollar bullish but expect a lot more consolidation as market whales want to see rate cuts.

This week the focus will be on CPI data. This will give us clues on when the FED will start cutting rates.

If we see:
CPI = Strong —> Dollar bullish/consolidation
CPI = Weak —> Dollar bearish (SELLS BABY)
The same goes for other economic data reports.

Technical Analysis

• On the weekly/daily we are bearish from a price action point of view with this structure being unbroken even with last week’s strong dollar bullish data

• This further reinforces the idea of dollar bears as that is the broader trend and market investors (whales) are in favour of this

Bias

Overall, I am in favor for a dollar bearish bias.

Even though we had last week’s strong data, looking at price action. We saw a wick towards the upside (dollar bullish) and then immediately price moving with the overall trend of dollar bears due to rate cuts coming in.

Basically if we see:
Strong data/strong inflation figuresàDollar bullish/consolidation
Weak data/weak inflation figuresàDollar bearish
It is best to trade economic data reports that favour the bears as they are in control.

YEN

Background & context

The YEN has behaved completely in the opposite direction of all other major central banks. Where nations such as the US, Eurozone and the UK have been increasing interest rates to bring inflation down.

Japan has been reducing interest rates and keeping them at -0.10% to increase inflation!

But why? Because Japan has a hard time bringing about inflation/economic growth. This is caused by an ageing population and geographical restrictions and other factors.

Thus, the YEN has been bearish since 2020.

The main driver behind the YEN is inflation reports. We keep a close eye on these.

We only short the YEN on weak inflationary reports and keep shorting until price action retracts.

The question on everyone’s mind in 2024 is: “when will the bank of Japan start increasing interest rates?”

This will be the main event of the year and the biggest trade.

Macro – Fundamental understanding

High interest rates —> YEN bullish
Low interest rates —> YEN bearish
Expectations of rate hikes —> YEN bullish
Expectations of rate cuts —> YEN bearish
Strong economic data —> YEN bullish
Weak economic data —> YEN bearish

The week ahead

The name of the game for the YEN is to wait when the BOJ will start increasing interest rates. We’ve been playing this game since 2022 and it has been the same response week after week.

There is hope 2024 may be different but we will wait and see. In terms of economic data for the week ahead, there is nothing.

Technical Analysis

• Technically we have been stuck in a range since July 2023. This is a sign of the growing confidence from market whales to start loading up buys

• Nonetheless, if we see a break below 767.00 + dovish statements from BOJ talking about keeping rates in the negatives we will short.

• IF we see BOJ INCREASES the rates. WE BUY TO THE MOON!

Bias

Overall, a bearish bias on the until we see concrete proof from the BOJ on raising rates. Until then it is all speculation. It may very well be until April 2024 that we see a decision being made.

Until then, short the yen based solely off technicals.

EURO

Background & context

The main driver for the EURO is also the central bank (The ECB). Like the US economy, the Eurozone increased interest rates during 2022 to control high inflation.

In 2023, the ECB announced that they’ve stopped increasing interest rates and are now looking at inflation figures and economic data to gauge WHEN to start cutting rates.

The weaker the dataàthe sooner rate cuts will come into play.
Also, the eurozone has been dealing with low economic growth since the Russian

invasion of Ukraine as this signals a poor investment opportunity to market whales.

Similar to the FED, the ECB will cut rates. Just a question of when. To gauge this, we will keep an eye on economic data. Best looking for weak economic data to short the euro.

Macro – Fundamental understanding

High interest rates —> EURO bullish
Low interest rates —> EURO bearish
Expectations of rate hikes —> EURO bullish
Expectations of rate cuts —> EURO bearish
Strong economic data —> EURO bullish
Weak economic data —> EURO bearish

The week ahead

Last week, eurozone inflation rises to 2.9%.

Eurozone inflation has been falling and dropped to 2.4% y/y in November, within striking distance of the 2% target. The downward trend reversed itself in December, as CPI jumped to 2.9%, just below the consensus estimate of 3.0%. This was the first uptick in inflation since April. There was better news from Core CPI, which dropped to 3.4% y/y, matching the consensus estimate and down from 3.6% in November. This marked the lowest level for the core rate since March 2022.

The eurozone inflation report should not have come as a surprise, as Germany, the bellwether of the eurozone, posted similar numbers earlier this week. German CPI rose to 3.7% y/y, up from 3.2%, while the core rate fell from 3.7% to 3.5%.

I don’t expect the European Central Bank to lose much sleep over a spike in one inflation report, but policy makers will be on the alert for inflation continuing to rise.

The drop in Core CPI is an encouraging sign, as the core rate is considered a more accurate gauge of inflation trends than the headline release.

In terms of economic data, this week we have the German CPI preliminary reports. Weak data —> Euro bearish
Strong data —> Euro weak bullish/consolidation

Technical Analysis

- I can see further downside on EURUSD with HTF bearish market structure still in formation.

Bias

My bias for EURO is weak bearish. Bearish because of rate cuts coming in and due to low economic growth. However, a weak bearish stance due to the high positive correlation between USD & EURO.

If USD is bearish (expected outcome), euro is bullish. Simply how it is. So, we may see a tug of war between bulls and bears.

GBP

Background & context

There is a similar story to the GBP. However, it has been hit the WORST out of the G7 nations with blistering high inflation.

To combat this, the central bank (Bank of England) has been increasing interest rates since December 2021.

But it’s not that simple.

You see, the UK economy is really struggling with economic growth. From Brexit to Lockdowns and finally rate hike increases. As if the first two weren’t enough to slow the economy down.

There is a story to tell here.

1. Notice how during the start of the rate hike cycle, the GBP wasn’t bullish? In fact, it was very much bearish. This is because the lingering impacts of Brexit were plaguing the British economy.

2. Notice how only in October 2022 (a full year later) we saw GBP strength come in BECAUSE... this time they increased interest rates by a record 0.75% in one go. Instead of the 0.25% they had been doing. (image below)

So, let’s do some basic logical analysis here.

1. Interest rates go up to battle inflation, yet GBP is still weak due to Brexit & lockdowns.

2. Inflation keeps rising forcing a 0.75% rate hike in one go.

à Now that interest rates are done hiking and will start cutting soon. That is one less impacting variable. SO.... Which impacting factor is left? That’s right. Lingering Brexit weakness.

Once the rates start getting cut, I’m expecting more weakness from the GBP.

And frankly this lines up perfectly with the overall historical trend of the GBP. A downtrend.

Macro – Fundamental understanding

High interest rates —> GBP bullish
Low interest rates —> GBP bearish
Expectations of rate hikes —> GBP bullish
Expectations of rate cuts —> GBP bearish
Strong economic data —> GBP bullish
Weak economic data —> GBP bearish

The week ahead

With the above in mind, we don’t have a hugely exciting week in terms of economic data for the GBP.

We do have BOE speaker, Gov Bailey speaking on Wednesday and GDP data on Friday.

Again, to push the GBP bearish bias, we need dovish comments from the BOE and weak GDP data.

Technical Analysis

• We can see a consolidation phase after rejecting the 128 Key level further reinforcing the technical structure of GBP bears.

Bias

Overall, I am in favor of a GBP bearish bias. For the time being, yes interest rates are high and will stay higher as long as we see strong data. However for the GBP, we’ve seen a string of weak data for months in 2023 and inflation cooling down much faster.

So it’s simply a question of when the BOE will start cutting rates in which case we will jump in to short.