Week of Noisy Trading Ahead (Jan. 27)

The Bounce at the End of Last Week

Initially, the surge in the FX markets towards the end of last week surprised me, but upon reflection, it was not unexpected. It was inevitable, given the severe decline in the EUR, AUD, and GBP. However, this is something that I am looking at as an opportunity in these pairs, as the USD will still have plenty of reasons to stay strong at the end of the day. After all, foreign investment is increasing, not decreasing, in the US. Over time, the currency markets will continue to reflect this, albeit not necessarily in a linear fashion.

In short, I am looking for exhaustion in EUR/USD, AUD/USD, GBP/USD, and NZD/USD to start shorting these pairs again. I would need to see sustained moves above 1.06 in the EUR/USD pair and the 1.26 level in GBP/USD to start to think in the other direction. As for AUD and NZD, these are tied to China more than anything else, so I would be looking into multiple other things, which makes those a bit more opaque in decision-making.

A Noisy Week Ahead

While I think the first day or two of the week might be slightly quiet, which normally will lead to “risk-on” behavior, the three central bank announcements will get things going on Wednesday. The Friday session will also have the Core PCE Price Index in the United States, which is the Federal Reserve’s favorite measure of inflation. However, by then it is entirely possible that the markets will be exhausted.

Bank of Canada

The Bank of Canada has its interest rate decision on Wednesday, at 2.45 pm GMT. This is the first of three interest rate decisions that I will be watching, as the BoC is expected to cut by 25 basis points, bringing the overnight rate to 3%. However, the real question is, How will they project going forward? While they are expected to continue cutting for 2025, there has been some information that could come into play here:

Inflation in Canada has decreased to 1.8% in December, which of course is below the 2% level the BoC sets as a target. Unemployment has decreased to 6.7%, showing signs of potential strengthening. However, the looming issue is the potential tariffs originating from the United States. This represents the most significant uncertainty. While you see a lot of bluster from Canadians over this issue online, the reality is that it would be brutal on the Canadian economy. It is because of this that the press conference will be the biggest factor going forward. I remain bearish on the CAD longer-term.

Federal Reserve

The Fed will be a bit of a difficult one, but the latest action in the Fed Funds Futures suggests that the Fed should be on hold. The Fed has a lot to consider, and Trump will keep it that way.

Some of the recent data in the US shows inflation still being an issue, with the latest CPI figures increasing slightly in December. However, the Core CPI was a bit lower, so this shows a “mixed bag” at best. The employment market continues to be robust, and I think this will be the biggest issue. However, you cannot rule out the egos involved here; as Trump has demanded lower rates, Powell might be that much more hesitant to cut in a bid to maintain the illusion that they are 100% independent. The USD will continue to stay strong.

European Central Bank

The ECB is expected to cut its rates by 25 basis points, sending it down to 2.75%. The ECB had recently suggested that they are getting ready to continue this rate-cutting cycle. The European Union has a lot to be concerned about, as the economy has been slowing, with almost all key indicators of growth showing sluggish momentum. Inflation in Germany rose to 2.6% in December, but the rest of the region remains rather subdued. (This is like herding cats, which is why I believe the EU will fall apart, but that’s a story for another time.)

The ECB also has to worry about the tariffs that could be coming from the United States, and obviously we are still trying to sort out the situation in Ukraine as well. This should accelerate to its conclusion though, as the US cuts off all funding in the last few days. I believe the EU is in a particularly bad spot, and this will continue to play out in the market. The stock indices have done well though, with the idea of front-loading exports and a weaker currency. Also, with the ECB to continue cutting rates, equities love that. I am still bearish on the EUR, but it is in the middle of a “relief rally.”

In Short, Hang On.

While I anticipate some surprises this week, it's important to remember that no trend remains smooth indefinitely. We have seen a big move in the US dollar for some time, and this recovery was to be expected. The way I am approaching this week is to look for a sign that the USD is strengthening. Once I see that, I am ready to pounce on the opportunity. Until then, I will probably look to cross pairs for trades that are a bit more simple to grasp. This will keep me away from challenging the USD, which is a dangerous thing to do in this environment.

A Client Story and a Warning.

I have been taking on private clients for some time now. Sometimes I coach them; sometimes it signals; other times they just want another set of eyes to bounce the ideas off of. Trading is a lonely business, and I find that a lot of people just need to know that they are at least making reasonable decisions because it is easy to get stuck in an “echo chamber of thought” by yourself.

However, I recently picked up a new client from Europe. He has experience and was more or less looking for a peer to discuss trading strategies with as well as help him review trades. (Essentially smacking him on the hand when he does something dumb.) Anyway, he told me his problem: He sometimes takes trades out of boredom. This is very common, and a huge red flag.

I explained how he should be more of a swing trader from everything he told me. He even agreed that this was the way. He has a business, family, and a chaotic work schedule. Because of this, the idea isn’t to be babysitting the markets; the idea is to make money. He agreed to all of this but almost immediately started in with, “Well, yeah, but I don’t think this will work for my personality. I need to be involved.” This was literally in the first 36 hours.

On the first day that the markets were open, it was just after the holidays. He sent me a text with 7 or 8 trade ideas. On the first trading day of the year. Anyone who has traded for more than about 10 minutes knows that the first few days of trading are somewhat thin, but here he was, knowing he needs to slow down - and even had data in the past that suggested he made more money when he does - but couldn’t wait to put on 8 trades on the first day of the year. In short, he has a gambling addiction. This is something that I think a lot of traders have.

In summary, we decided to part ways. I didn’t really want to be part of this, and although the contract would have been lucrative, I can see the disaster coming. I see this a lot with traders, who don’t seem to understand that the idea is to make money, not click buttons. I hope you all are keeping track of how trading results are being presented and paying attention. Numbers don’t lie; people do.

Trade well all,

Chris