human shape blocks on wooden seesaw

In our FX review this week, we talk through how risk sentiment took a positive bounce, but gains couldn’t be held onto as the week drew to a close. We also look ahead to the important US Fed meeting on Wednesday and what it could mean for markets.

Seesaw in risk 

The week was dominated by news coming out of Ukraine. Even though there were some positive sparks via peace talks, these ended without any progress. At the same time, the invasion continued to move on, with extensive shelling and casualties being reported.

As we flagged up last week, we did think that some crosses were oversold from a technical perspective at the end of last week. Given the hit for the Eurozone from energy prices, EURUSD and EURCHF had moved significantly lower (EURCHF even briefly broke below parity). Looking for a rebound, we went long EURUSD and EURCHF, as we detailed here.

We closed out these trades a couple of days later thanks to a move higher in both pairs. In the long term, we continue to be bearish EUR, however are happy to tactically buy dips when the pair becomes oversold. Indeed, we dipped back in by going long EURUSD again with the break below 1.10. It closed the week at 1.0909.

On Friday, we saw a resurgence in USD gains, stemming from the headlines around the potential for chemical warfare from Russia. This also brought GBPUSD down to close the week at 1.3025, and in real danger of moving below 1.2900. We are currently long the pair from higher levels but are considering hedging out our position early next week on a sustained break below 1.3000.

Eyes on the Fed

Amidst trying to remain nimble around the geo-political risks, it’s easy to forget that this week we have the US Fed meeting. With inflation at 7%+, we don’t see any risk that the Fed sit on their hands this week. Action is needed, but we are in-between on whether the FOMC will hike by 25bps or 50bps. There is more of a case to hold off from a 50bps hike given the events in Ukraine and the ripples through the energy and other markets. 

We feel that our view is broadly reflected in the USD at the moment, which is already very strong due to the safe haven flows. Even with this, we think that a 50bps hike would give more USD strength, while a 25bps would be unlikely to materially shift the greenback.

In reality, next week we think that although the Fed should provide volatility on Wednesday and Thursday, for the rest of the week the focus will remain on the news that is coming out from Eastern Europe. From that angle, we prefer to enter new positions that aren’t related to USD next week, looking rather to currencies such as AUD, JPY, GBP and CHF to try and eek out some trading gains.

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