Markets Are Fully Priced in the USD

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From Danske Bank:

“We are expecting the Fed to move up the Fed funds target range 25bp to 0.50%-0.75% from 0.25%-0.50% at the FOMC meeting next week. With economic data improving, the labour market is tightening and financial markets are relatively calm. Markets have fully priced in such a rise.

Since everyone expects a Fed rate rise, the most interesting question is how many hikes to expect next year from the Fed. We expect the median ‘dots’ to stay unchanged, signaling two hikes in 2017 and three in 2018.”

USDX daily

USDX daily

The concept of data or monetary policy being ‘fully priced in’, is for me the most interesting aspect of financial markets. Profitable Forex trading isn’t about a deep understanding of economics, it’s about understanding human behaviour.

As a trader, there is one main question to ask heading into tomorrow: In which direction would the market be disappointed and forced to significantly reprice?

For me, with the US Dollar at all sorts of resistance, a bearish scenario would play out if we saw some overly dovish projections for 2017 and 2018.

We spoke yesterday about USD/JPY reaching the first real post-Trump resistance level and this all ties nicely into the bearish scenario that we would rather be there to take advantage of above.

The initial play was to look for a rejection out of this higher time frame resistance level and then look for an intraday retest of short term previous support as resistance to enter into shorts.

USD/JPY daily

USD/JPY daily

As you can see from the daily chart, price wicked into our resistance zone and closed below. Quite the textbook bearish signal… well if there was such a thing as a ‘textbook signal’.

USD/JPY hourly

USD/JPY hourly

Zooming into an intraday hourly chart and you can see the types of re-tests that we look for to get entries that offer the best risk:reward ratios. If you want these big R:R trades, then you have to put yourself in a position to take advantage of them.

This is a guest post originally appeared on Vantage FX. Reposted with permission.

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