The difference between success and failure in Forex/CFD trading will most likely depend on it what assets you trade each week and in what directionand not the exact methods you might use to determine trade entries and exits.
Therefore, at the beginning of the week it is a good idea to get an overview of what is happening in the market as a whole and how those developments are being influenced by macroeconomic fundamentals, technical factors and market sentiment. Read on for my weekly analysis below.
Fundamental Analysis & Market Sentiment
I wrote in my previous article on 11th September that the best trades of the week were probably:
- Close to the currency pair EUR/USD, but only from reversals at the key resistance. There was a bearish reversal at $1.0195 that could have yielded a profit of around 130 pips by the week’s close.
- Length of the currency pair USD/JPY, but only from reversals at key support. None of my major support levels have been reached in the past week.
This resulted in an overall victory.
The news is dominated by last week worse than expected US CPI (inflation) data, which led to a strengthening of risk-off sentiment and drew inflows into the US Dollar. The data suggests that inflationary pressures remain stronger and greater than widely expected, increasing the likelihood that the Fed will hike rates by a full 1.00% this week, with a best-case scenario of 0.75 effective % given is. Goldman Sachs has cut its US GDP growth forecast for the US in 2023 to 1.1% from 1.5%. The 2-year US Treasury yield rose sharply from the 3.50% area to a new multi-year level of over 3.90%, while the US dollar index also hit a multi-year weekly high at the close. Stock markets plummeted The key S&P 500 index ended the week 5.15% lower, while nearly all other major global indices also fell, most notably China’s HSI, which is on the verge of making fresh long-term lows.
In terms of market moves, the most dramatic outside of the equity market has been in the commodities sector, with nearly all commodities ending the week lower. Gold was a notable highlight as it closed well below $1700 at a near 2.5 year low. In the forex market, the Japanese yen refused to fall further despite the strength of the US dollar, likely due to signals being sent by the Bank of Japan and other Japanese policymakers that the yen’s slide has gone far enough for their liking. However, the major forex moves during the week were inflows from the commodity currencies (the Canadian, Australian and New Zealand dollars) into the US dollar the GBP/USD currency pair also collapsed to make a fresh 37-year low below $1.14.
The details of the major economic data releases over the past week can be summarized as follows:
- US CPI – up 0.1% monthly despite expectations for a 0.1% decline.
- UK CPI – came in slightly below expectations at an annualized rate of 9.9% despite expected 10.0%.
- UK GDP – came in lower-than-expected with a monthly increase of 0.2% vs. 0.3% expected.
- US PPI – monthly decline of 0.1%, just as expected.
- US Retail Sales – These rose 0.3%m/m while a 0.1% decline was expected.
- New Zealand GDP – grew 1.7% in the quarter, ahead of 1.0% exp.
- Australian Unemployment – Slightly worse than expected, the unemployment rate edged up to 3.5% from 3.4%.
- US Empire State Manufacturing Index
- Preliminary UoM consumer sentiment data in the US
The forex market witnessed relative strength in the US dollar last week. The weakest currencies were NZD, AUD, CAD and GBP.
The number of coronavirus infections fell worldwide last week for the ninth straight day. The only significant increases in overall newly confirmed coronavirus cases are currently taking place in Russia and Taiwan.
The coming week: 19th September – 23approx Sep 2022
The coming week in markets is likely to see significantly higher levels of volatility than last week as several key central bank releases are due, including the most important event on the forex calendar, the US Federal Reserve’s monetary policy decision. The releases due are, in order of likely importance:
- FOMC Federal Funds Rate, Statement and Economic Forecasts.
- Bank of Japan monetary policy and interest rate statement
- Bank of England Official Policy Rate and Summary of Monetary Policy
- Key interest rate and monetary policy of the SNB
- Minutes of the RBA monetary policy meeting
- Canadian CPI (inflation) data.
- US Federal Reserve Chairman Powell will give a short speech
- Manufacturing and Services PMI data for the US, UK, Germany and France
- The governor of the RBNZ will give a small speech
This Monday the 19th is a public holidayth September in Japan and UK and Friday 23approx September in Japan.
US dollar index
The weekly price chart below shows The US Dollar Index issued a bullish candle that closed in line with the long term trendwhat is bullish.
The weekly close was the highest in many years, which is a bullish sign. However, it should be noted that this is hardly higher than the closing price of two weeks ago, and that last week’s high did not exceed last week’s high. These are signs that bulls may need to be cautious.
The main reason for the muted bullish sentiment is that the dollar’s two main counterparties, the Japanese yen and the euro, are holding up relatively well despite the dollar’s strong gains against other currencies. Nonetheless, the dollar received a major boost from the higher-than-expected US CPI data released last week.
We appear to have formed a new level of support at last week’s low near or near 108.00contributing to the bullish case.
It remains a good idea to keep an eye out for long trades in the US Dollar over the coming week. This is a very strong long-term uptrend in the major currency in the forex market.
seen last week gold Print a bear outside bar This took the precious metal to its lowest price since the coronavirus panic of April 2020. The candlestick has a significant lower wick, so bears need to be at least a little cautious here.
I don’t like short trading gold, because historically it is not trending down smoothly and predictably. However, gold is strongly positively correlated with the US stock market and we see stocks and other commodities all moving lower as risk aversion sends strong cash flows into the US dollar. There is currently no haven from inflation in the market and the solution for investors seems to be for the US dollar to continue to appreciatedespite its high inflation rate.
The NASDAQ100 The tech index fell sharply last week, printing a bearish outer bar as nearly all major global stock indices fell. Global equities have taken a major hit on the persistently high inflation data we are seeing in the US, leading to heightened expectations that the Fed will hike rates by a full 1% this week. which would make life difficult for large companies and consumers.
I dislike going short on stocks as they are prone to sudden and strong bullish reversals. but there may still be opportunities here on the short side if we continue to see strong bearish momentum when markets open on Monday.
Over the past week, the GBP/USD currency pair printed a bearish outer bar, taking the currency pair to its lowest price since 1985, a 37-year record low.
This is a very bearish sign, but bears should note that not only does the candlestick have a significant lower wick, but the low has rejected the key support level and the confluence of round numbers at $1.1400.
The US Dollar is strong but is unable to appreciate against the Euro and Japanese Yen. The British pound is being plagued by extremely high inflation nearing 10% and a sluggish economy, with the Bank of England forecasting a 5-quarter recession from the end of this year. Therefore, there are good fundamental reasons to see a good case for a short trade.
I would not enter short trades until the price is below last week’s low of $1.1350 as it would then be trading under “blue skies” not seen in decades and would have no technical limit to counter another sharp decline.
seen last week the currency pair NZD/USD Print a bearish outside bar that took the currency pair to its lowest price since the May 2020 coronavirus panic. The candlestick has a significant lower wick, so bears need to be at least a little cautious here.
Over the past week, the US dollar has appreciated significantly against the pound sterling and the three commodity currencies, the latter including the NZD, and the NZD has fallen more than either the Australian or Canadian dollars. Therefore, I think that trading short this currency pair is probably an excellent way to take advantage of the current risk aversion in the market. However, it is important to wait and see how the coming week starts and what happens during Monday’s Asian session when this pair is usually quite active.
It is interesting to note that NZD’s relatively high interest rate is not preventing it from falling to new long-term lows.
I would not enter any short trades until the price is below last week’s low of 0.5940.
I probably see the best opportunity in the financial markets this week to be short the GBP/USD currency pair below $1.1350.
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