Trading Strategy Webinar: Rates, USD, EUR/USD and Stocks

(MENAFN- DailyFX) Trading Strategy Talking Points:

  • This is a video from an archived webinar in which I looked at many markets, including forex markets like the US dollar and EUR/USD, as well as macro things like rates and their impact on shares.
  • Rates have been falling lately despite an inverted yield curve. I covered this topic a bit later in the webinar and what I think it means. Notably, today saw a sharp rate hike on the heels of some comments from Fed speakers. But, so far, the actions have not breached the support.
  • The analysis in the article is based on price action and chart formations. For more on price action or chart patterns, check out our DailyFX Education section.
  • The quarterly forecast has just been released by DailyFX and I wrote the technical portion of the US Dollar forecast. To get the full article, click on the link below.

We are at an interesting time in markets where there are two defined camps. The first camp is bullish, with many believing stocks have already bottomed. This view also generally fuels the expectation that rates have peaked – and that the Fed may even be approaching the end of its hike cycle. This side can point to Chairman Powell’s remarks during the last FOMC rate decision regarding the fact that, in his opinion, we are now at the neutral rate. And he also felt that now would be an opportune time to return to a more data-driven mode, which again illustrates that the Fed may think it has made enough moves to start fighting inflation?

This camp can also point to much of the past 13 years since the financial collapse in the pattern presented by the Fed, where economic distress was quickly offset by more and more accommodation. Case in point – even a global pandemic couldn’t dampen markets as the liquidity engine ignited less than two months after covid hit the US and a few months later the S&P 500 was already to a new record high.

The other side looks at inflation still at 9% and thinks that, well, those on the first side must be missing something, to put it politely. This camp also has about nine months of FOMC comments underscoring the importance of fighting inflation and, logically, the need to do so before the midterm elections later this year. Americans often vote with their wallets and with so much fuss over inflation, it’s hard to imagine a positive outcome for the incumbent party, making it tricky to set up ahead of the 2024 general election.

So the question really boils down to a two-pronged dilemma: how serious is the Fed about fighting inflation? Are they really ready to drive the S&P 500 down to 3,000 or maybe even 2,500? And, more precisely, to what extent will the rate hikes they have already implemented have an impact?

Market prices

It is important to emphasize that the Fed does not control the rate markets. They control federal funds, but these are very short-term loans. This should logically flow through the yield curve, so when the Fed raises short-term rates, long-term rates, which carry more risk for a while, also rise.

When it breaks down, something is wrong…

For much of this year, Treasury rates have followed these Fed rate hikes in a general sense. As the Fed raised rates, Treasury bill rates also rose. That is, until the June rate decision. The 10-year exceeded this rise by about 75 basis points with a yield of 3.5% – then retreated, through the July rate hike and until today.

Now the reason that matters is because it was one of the variables that helped drive stock prices higher, pushed by those in camp one who thought that, maybe the Fed was about to complete its rate hikes? So while yields have fallen since that June rate decision, stock prices have surged.

But that started to change today as the Fed is now out of its blackout period, and we’re hearing from several Fed members, like Mary Daly, that the bank is “far from finished.” We also heard Neel Kashkari and Charlie Evans, both known as doves, but they spoke in a warmongering way, much like Mrs. Daly. In response, we are seeing a major 10-year move that also shows a bullish engulfing pattern.

US 10-year rates

Map prepared by James Stanley; 10-year rates on Tradingview

Treasury Curve

This increase in yields is unfortunately uneven, with short-term yields now seeing a bigger move than longer-term yields. Another way of saying this is that the yield curve is increasingly inverting, which is not a bullish sign.

In the webinar, I gave a fairly detailed description of why this is happening.

The 2/10 yield curve is now at its most inverted level since September 2000 – so even before the presidency of George W. Bush.

U.S. Treasury Yield Spread 2/10

Chart prepared by James Stanley


The biggest beneficiary of this in the FX space is the US dollar. Earlier today I had posted about US dollar price action settings and highlighted a dollar at a key support point, after building a descending wedge pattern, which had taken the form of a bull flag.

Today’s rate hike and in turn the USD helped DXY rally. It is now at that key test point I pointed to earlier today, at the 38.2% Fibonacci retracement of a recent move higher. A bullish break outside the wedge leaves the door open for USD continuation, and there is a big pushing point on this theme that I will examine below.

US Dollar Daily Price Chart

Map prepared by James Stanley; USD, DXY on Tradingview

EUR/USD Bearish Engulfment

This daily bar is not over yet, but it looks like it might be closing as a bearish craze. If so, this could present a possible change from what has become an otherwise boring EUR/USD story. Thanks to the 50bps hike from the ECB and the most recent 75bps hike from the Fed, EUR/USD remained in a rectangular formation.

This started to give way yesterday as the bulls forced their first close above 1.0233 in almost a month. But the sellers reacted here and the daily bearish engulfment, in the direction of the general trend, may reopen the door for bearish continuation strategies on the EUR/USD, and this could synchronize with the bullish strategies on the USD discussed above.

In my opinion, I would have preferred a deeper withdrawal. The 1.0340 level is important because it was a 19-year low for quite some time, and it even held the selloff for a few months before finally breaking down. Ideally, I would like to see this level tested as resistance before planning a new parity test and, perhaps, even a break.

But that’s price action. React or not, he doesn’t care what I want.

EUR/USD daily chart

Map prepared by James Stanley; EURUSD on Tradingview


The big question about rates is: will equities react?

Rising rates became a big deal for equities in the first half of the year, causing the S&P 500 to pull back 25% to go with the Nasdaq 100 falling 34% (from the November high). 2021).

But, since mid-June, around the FOMC rate decision and around when rates peaked, stocks have been soaring ever since.

In the S&P 500, there has been a falling wedge formation, often followed for the purpose of bullish reversals. And the reverse happened when prices broke out a few weeks ago and continued to climb to new higher highs.

Price action has begun to stagnate – and we are now starting to see inside bars imprinting on the four-hour chart, illustrating potential for near-term change. As I wrote in this week’s technical forecast, there is more resistance around the 4200 level, so if this trend continues, there is another place for sellers to watch. But, in the short term, the Fibonacci level at 4085 held support on Friday and again today – a breach below that opens the door for a deeper pullback, which brings the 4000-4016 zone back into the equation.

If the sellers are able to push back below the psychological 4k level, the bears will have a little more work to do and this could signal the return of the uptrend. It is still early days, but given the current context, there is potential.

S&P 500 daily chart

Map prepared by James Stanley; S&P 500 on Tradingview

— Written by James Stanley, Senior Strategist, and Head of DailyFX Education

Contact and follow James on Twitter: @JStanleyFX


Garland K. Long