The past week has seen a very strong reversal in the Forex market, with the US Dollar selling sharply and equity markets rising firmly, as US inflation data finally begins to show a significant decline.

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The difference between success and failure in Forex/CFD trading is very likely to depend primarily on which assets you choose to trade each week and in which directionnot on the exact methods you might use to determine trade entries and exits.

So, as you start the week, it’s a good idea to get an overview of what’s developing in the market as a whole, and how those developments are affected by macro fundamentals, technical factors and sentiment. of the market. There are currently strong short-term trends in the market, which could be profitably exploited. Read on to get my weekly analysis below.

Fundamental analysis and market sentiment

I wrote in my previous article on the 6e November that the best trades of the week were likely to be long short trades in CAD and NZD. It was a good move as both currencies rose during the week.

The news is currently dominated by that of the past week sharper than expected decline in US inflation data, which saw the annualized CPI jump from 8.2% to 7.7%, when a drop to just 8.0% or 7.9% was widely expected. These are the key economic data markets have watched in recent months as historically high levels of inflation forced central banks to make a series of sharp rate hikes, pushing the US dollar much higher and sinking stock markets. Analysts were waiting for the end of this movement, which would logically occur when inflation in the major economies really started to fall, showing that the tighter monetary policies imposed by central banks seem to be working. This in turn gives hope central banks can start easing the tightening, especially the Fed in the USgiving the stock markets more hope and deflating the recent huge US dollar rate hike.

This development sparked an unusually strong move in the Forex market over the past few days, with the US Dollar selling very strongly and other currencies making dramatic gains against it. For example, the USD/JPY currency pair fell more than 5%, while the EUR/USD currency pair rose just under 4%. Equities and commodities also received a major boost, with the S&P 500 index rising more than 6.5% during the week. However, some institutions are signaling that these rises are too euphoric so they may not be sustained any longer, and in technical terms they are very strongly against the trend.

In other major news from the United States, While the Republican Party still looks very likely to regain control of the House of Representatives as last week’s votes are counted, it has become clear that it has failed to take control of the Senate. It’s a boost to the likely success of President Biden’s agenda for the rest of his term.

The UK released GDP data which showed a worse than expected monthly decline of 0.6% (a drop of only 0.4% was expected). However, this hasn’t had much of an effect on the British pound, which is performing as well as the euro. A rumor emerged over the weekend that the UK government was considering announcing £35bn in public spending cuts and £20bn in tax increases. It is extremely likely that the UK will be in a technical recession at the start of 2023.

The last major data release last week was the preliminary UoM consumer sentiment in the US, which came in weaker than expected.

The Forex market saw the most strength in the Japanese Yen last week, much to the relief of the Bank of Japan which had been trying to combat excessive Yen weakness over the past few weeks and months. The weakest currency was clearly the US dollar.

Coronavirus infection rates declined around the world last week, continuing a trend started 4 months ago. The raw numbers haven’t been this low since the first wave ended in the summer of 2021. The only significant increases in new confirmed coronavirus cases are currently occurring in China and Japan.

Next week: 14e November – 18e November 2022

The coming week in the markets should see a lower level of volatility, as while there are several major data releases scheduled, none of them are likely to come close to the impact of last week’s US inflation data. The planned outings are:

  1. UK CPI (Inflation) Data
  2. Canadian CPI (Inflation) Data
  3. US PPI data
  4. U.S. retail sales data
  5. Australian Monetary Policy Meeting Minutes
  6. UK unemployment data
  7. US Philly Fed Manufacturing Index
  8. US Empire State Manufacturing Index
  9. Australian Wage Price Index
  10. UK monetary policy report hearings
  11. Australian unemployment data

Technical analysis

US dollar index

The weekly prize chart below shows the US dollar index printed an extremely sharp decline candlestick that closed right on its low. The size of the weekly decline was the largest seen in several years for the US dollar. The price easily broke through two former support levels which are now likely to act as resistance if hit.

The US Dollar’s long-term uptrend is in serious trouble and may well be over as we finally see inflation numbers coming down significantly, suggesting that the Fed won’t be under as much pressure to make another big rate hike. This will logically bring lower value for the US dollar, but higher values ​​for stocks, commodities and other risky assets.

We could see a short-term bullish retracement of the US Dollar before the price falls much further as each major pair of US Dollars has come into a zone of likely strong support for the US Dollar, but buying the US Dollar upside to this, in an unusual way. strong, fundamentally driven short-term momentum looks likely to be very dangerous.

The best trades over the coming week are likely to be either shorting the US dollar or avoiding the greenback altogether.

US dollar index weekly chart

USD/JPY

Last week saw the USD/JPY currency pair print an unusually large bearish candlestick that closed very close to the low of its range after easily breaking through several former support levels. The fall was already underway but really gathered momentum after US inflation data came in weaker than expected, dampening expectations of a more hawkish Fed rate policy. This currency pair had been overloaded against the wishes of the Bank of Japan, which had recently started to intervene to lower the price. All of these factors have contributed to the abnormally sharp fall in prices that we have just seen.

There is very strong bearish momentum here, so it seems quite possible that the price will reach the nearest support level at ¥137.04 over the coming week.

USD/JPY Weekly Chart

EUR/USD

Last week saw the EUR/USD currency pair print an exceptionally large bullish candlestick that closed very close to the top of the weekly range.

The strong long-term bullish trend in the US Dollar is now likely over, and the Euro is showing strong near-term strength.

Although the price had already risen from the recent long-term well before last week, weaker than expected US inflation sent the US Dollar falling, which was felt strongly in this currency pair.

Although there appears to be very strong short-term bullish momentum here, bulls should keep in mind that this currency pair likes to make retracements even in strong trends, and price ended last week at this which appears to be a strong resistance level at around $1.0355, so the price is unlikely to rise further in the near term.

EUR/USD weekly chart

Gold (XAU/USD)

Last week, the price of gold rose very strongly, printing a large bullish candlestick that closed on its high. This was driven by the unusually steep drop in the US dollar which was triggered by a long-awaited print of US inflation below expectations signaling a significant drop.

Despite its common reputation as a safe-haven asset, gold has a historically positive correlation with the US stock market, so it’s no surprise that gold is rising alongside equities.

We see firm short-term bullish momentum here, and what makes the price of gold particularly interesting for traders over the next few days is that unlike most major currency pairs, the price still has a long way to go before hitting a key resistance area.

It is likely that the price will continue to rise over the next few days until at least the nearest resistance level at $1809.

XAU/USD weekly chart

Conclusion

I see that the best opportunities in the financial markets this week are likely to trade short on USD/JPY targeting ¥137.04 and long on XAU/USD targeting $1809.

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