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US Fed Policy Mistake and Cryptocurrencies
Written by: PaxForex analytics dept - Tuesday, 25 December 2018 0 comments
Last year at this time, trader across the world enjoyed a US Fed which was perceived as steering a goldilocks economy. Even throughout 2018 the US printed solid economic figures with GDP growth around 3.5%, the unemployment rate around 3.5% and annualized CPI inflation near 2.0%. The Fed was slowly increasing interest rates and most felt comfortable in the economic environment. The US Dollar was attracting bids as forex traders flocked to the greenback. Retail traders felt additionally cheerful as cryptocurrencies, led by Bitcoin, surged with no end in sight.
While the start of 2018 featured a continuation of this trend, the situation changed rather fast. The day Bitcoin futures were introduced, the market reached its all-time intra-day high and the bubble started to deflate. Prices across the cryptocurrency space were faced with severe downside pressure and may have bottom last week. The sell-off lasted for most of 2018 and was extended despite an improvement in fundamentals. Selling pressure has now been exhausted and some cryptocurrencies such as Ethereum, Bitcoin Cash and Ripple started to accelerate to the upside. Bitcoin was leading last years surge in prices, but is lagging in the current rebound.
The second-half of 2018 saw economic data out of the US weakening as President Trump started to wage a trade war with China which has deepened. Despite the contraction in the economic picture, the US Fed decided to remain focused on showing markets their integrity and standing up to President Trump who has publicly criticized the central bank. He even explored legal grounds to fire Fed Chief Powell, the man he endorsed to take over from Janet Yellen. Despite plenty of warning signs, the Fed continued to increase interest rates throughout 2018.
A growing number of analysts and traders are now joining the Trump chorus and criticize the Powell led Fed for raising rates and admitting that the balance sheet reductions are on auto-pilot. The US Dollar has paused its strong rally and the US Treasury curves continues to flatten, with an inversion at the front end. Will the US Dollar continue to weaken in 2019 and cryptocurrencies extend their rally? Open your PaxForex Trading Account now and gear up for a very profitable 2019!
The opinion that the US Fed has boxed itself into a corner is gaining approval and more traders now expect that the central bank is set-up for a policy mistake in 2019. This may push the US economy into a recession faster than currently priced in. Trump claims that the only problem the US economy faces is the Fed. He tweeted “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch - he can’t putt!” A US Fed policy mistake and cryptocurrencies combine for three great trades to add to your forex trading account!
Taking a longer-term view on the USDJPY shows that plenty of room remains for this currency pair to extend its contraction. As a Fed policy mistake is expected, the US Dollar is set to weaken further while the Japanese Yen will attract safe
haven bids from forex traders. Price action is anticipated to descend into its next horizontal support level with the assistance from its primary descending resistance level. Forex traders are recommended to sell the rallies in the USDJPY from current levels.
Just as confidence in the US Fed is contraction, BTCUSD price action is expanding. After grinding out a new horizontal support area, this cryptocurrency completed a breakout which initiated a short covering rally. Given the steep sell-off, BTCUSD is now clear to continue its bullish move until it can challenge its primary descending resistance level. This level is located just below its next horizontal resistance level which forms the lower band of its previous support level. Buying the dips down to the upper band of its horizontal support level is favored.
The US-China trade war is likely to extend next year which will place pressure on commodity currencies such as the Australian Dollar and the New Zealand Dollar. The Australian economy may be better poised to navigate through the economic issues given its size. The AUDNZD descended into its horizontal support area from where a breakout is expected. Bullish momentum should suffice to push price action above its secondary descending resistance level and back into its next horizontal resistance level. Forex traders are advised to buy the AUDNZD inside of its horizontal support area.