Trading the Fed decision – Long USD/JPY and short GBP/USD

FOMC rate decision is due tomorrow and the market is significantly under appreciating a possibility of rate hike. In my opinion a rate hike is coming, if not atleast a strong indication of a June rate hike is due and here is my simple reasoning for that –

All “low inflation is a problem” talks is nothing but weak oil and hence consider this..

  • Fed moved rates in December, when oil was falling and more importantly people were calling for sub-$20 oil. Manufacturing was in recession back then as well.
  • Today, oil is nearing $40 and markets are calling for further rise on hope OPEC and non-OPEC would reach some kind of an agreement. Manufacturing is in recession today as well, but labor market has improved.

Hence, merely because no one in the market expects Fed to move rates ahead of Presidential elections, Yellen and her colleagues ideally should not oblige!

Thus am in favor of buying dollar over currencies which appear weak technically/fundamentally

My first pick is USD/JPY and here is why

USDJPY H4 (03-15-2016 2355)

  • Pair’s recovery today from the strong support zone around 112.50, which also kept intact symmetrical triangle formation, has increased the odds of a break above 113.50 (23.6% Fibo).
  • Adding longs here makes sense for an immediate target of triangle resistance around 114.30-114.40.
  • The bird is likely to test the same ahead of FOMC and may witness an upside break if Fed comes out with rate hike/or indicates rate hike in June.
  • Bullish positions should be squared off if the hourly chart sees a bearish break from symmetrical triangle

Another pair that attracts me is GBP/USD. I would prefer entering into shorts and the rationale is simple –

GBPUSD D1 (03-16-2016 0002)

  • Daily chart show failure to re-enter falling channel followed by a fall back inside falling trend line.
  • Coupled with renewed Brexit fears, this pair looks a good short, although I would want to wait before moving into a short trade. tomorrow’s London open would be a good time to enter shorts and I shall post an update about the same here.

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