This is an aggressive trade aimed to capitalize on a deeper retracement to 1.10, with a good risk reward ratio.
More conservative traders may want to wait for a bearish trend to develop below 1.1160. This would leave more profit on the table, but would have a higher probability of working out.
Another hike and Quantitative Tightening to Come
On Wednesday, the Fed hiked rates 25 basis points and indicated that they were still on track to raise rates once more this year. The rate hike was largely expected, though there had been some doubts over the past two months.
A few hours before the announcement, the dollar weakened significantly when retail sales numbers were released. That sell-off lead to an important test of resistance at 1.1284. The Euro did trade as high as 1.1297, but quickly retraced, which showed us just how strong that level is.
Janet Yellen also indicated that the Fed is keen to begin reducing its balance sheet – this would amount to quantitative tightening.
EURUSD 4-Hour chart – Setting up for a deeper pullback
Since the rate announcement the USD has seen sustained strength. The market’s reaction, and the reinforcement of that resistance at 1.1284, makes a deeper pullback to below 1.10 more likely.
The counter argument to that is that this is now what the market is expecting. But, retail sentiment suggests the market is evenly balanced, so we are unlikely to see a squeeze in either direction. Therefore, at this stage, if the short-term USD strength fades, its likely to be something political that does it.
In the longer term, many traders are seeing the economic data and Janet Yellen’s rhetoric diverging. They believe she is trying to talk the market around to her narrative, but that she will be forced to alter course later in the year. We are likely to see this debate dominate over the coming months.
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