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Fundamental Analysis & Market Sentiment

I previously wrote on Sunday, Dec. 15, 2024 that the best trade opportunities for the week were likely to be:

• Long Bitcoin in US dollar terms following a daily (New York) close above $103,647. This set up on Sunday, but Bitcoin then fell by 7.63%.
• Short of the EUR/USD currency pair following a daily (New York) close below $1.0414. This set up on Wednesday, but unfortunately the price has risen by 0.75% since then.
• Long of the Nasdaq 100 Index. This fell by 1.84%.
• Long of cocoa futures or a cocoa ETF/ETC. This rose by 5.79% over the week.

The weekly loss of 4.43% equals 1.11% per asset. Meanwhile, last week’s key takeaways were as follows:

1. US Federal Funds Rate, FOMC Statement & Economic Projections – a rate cut of 0.25% was delivered as expected, but the lowering of the Fed’s forecast to only two rate cuts in 2025 was a hawkish surprise that boosted the dollar and knocked US stock markets.
2. US Core PCE Price Index – this is the Fed’s preferred inflation indicator, and it rose by only 0.1% month-on-month when 0.2% was expected, delivering a dovish surprise and counteracting the effects mentioned above.
3. US Final GDP – annualized economic growth was steady at 2.8%, as expected.
4. Bank of Japan Policy Rate and Monetary Policy Statement – no surprises were seen here.
5. Bank of England Official Bank Rate, Votes, and Monetary Policy Summary – the voting for a rate cut was a little more dovish than expected, although the interest rate was left on hold at 4.75%.
6. US, German, British, French Flash Services & Manufacturing PMI – services outperformed and manufacturing underperformed expectations everywhere.
7. US Retail Sales – this came in mixed, with the overall data slightly stronger than expected, while the core data was weaker than expected.
8. UK CPI (inflation) – this came in as expected at an annualized rate of 2.6%.
9. Canadian CPI (inflation) – this came in a fraction weaker than expected.
10. UK Retail Sales – this was considerably weaker than expected, with a month-on-month increase of only 0.2% when 0.5% was forecasted, suggesting a slowing economy.
11. Canadian Retail Sales – this came in a fraction weaker than expected.
12. New Zealand GDP – this was much worse than expected, showing a decline of 1.0% when a decline of only 0.2% was forecast, raising fears that New Zealand will enter a recession.
13. US Unemployment Claims – this came in almost exactly as expected.
14. UK Unemployment Claims (Claimant Count Change) – this came in considerably better than expected.

Another noteworthy item is the remark coming from a member of the European Central Bank’s decision-making body, which stated that rate cuts will continue over 2025.

Last week saw a strong reversal against the ongoing trend of a strong US stock market, after the Federal Reserve produced a more hawkish approach towards rate cuts, although this was itself partially reversed on Friday with the release of lower PCE data.

President-Elect Trump tweeted over the weekend his disappointment with the fees Panama is charging the US for its use of the canal which the US handed over to Panama in the 1970s. Trump even threatened to seize the canal back. Trump is probably just trying to get a discount, but his remarks may have the effect of weakening the Panamanian balboa when markets open.

In the Forex market, the commodity currencies (such as the Australian dollar, the Canadian dollar, and the New Zealand dollar) have been notably weak.

The Week Ahead: Dec. 23-27, 2024

The coming week has a very light schedule due to the Christmas holiday, with many major markets on hold from Tuesday to Thursday. This means it will likely be a light week. The coming week’s important data points are as follows:

1. Canadian GDP
2. US Unemployment Claims

Monthly Forecast for December 2024

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For the month of December, I forecasted that the EUR/USD currency pair would fall in value. The performance of my forecast so far is as follows:

Weekly Forecast for Sunday, Dec. 22, 2024

Last week, I made no weekly forecast as there were no unusually strong price movements seen in currency crosses, which is the basis of my trading strategy.

The US dollar was once again the strongest major currency over this past week, while the Japanese yen was once again the weakest. Volatility was mostly unchanged during this period, as 41% of the most important Forex currency pairs and crosses changed in value by more than 1%.

Key Support/Resistance Levels for Popular Pairs

Technical Analysis - US Dollar Index

Last week, the US Dollar Index once again printed a bullish candlestick that continued in the direction of the long-term bullish trend, making its highest close and highest high price in more than two years. The recent price action also seems to have retested the upper trend line of the formerly dominant consolidating triangle chart pattern, which can be seen in the price chart below.

The price is above its price from three and six months ago, suggesting a healthy long-term bullish trend in the greenback that should be exploitable. However, the price has also rejected the resistance level shown below at the 107.95 mark, and the candlestick has quite a large upper wick. These are bearish factors to keep in mind.

I have plenty of fundamental reasons to be bullish on the US dollar, especially after the Federal Reserve’s hawkish tilt last week took markets by surprise and triggered a rise in the greenback and a sharp selloff in stocks, all while US treasury yields rose. However. Friday’s PCE data showed inflationary pressure as lower than expected, which pushed the dollar lower and stocks higher.

There is a bullish trend in this space, but it may be a bit weak and signal slowing momentum. Overall, I see the dollar as more likely to rise than fall over the coming week.

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EUR/USD

The EUR/USD currency pair appears to be in a valid long-term bearish trend. This currency pair typically takes its time to move, with its trends usually including plenty of deep retracements. However, for almost three weeks after plunging to a new long-term low price well below the $1.0400 mark, the price consolidated without turning definitively bearish.

This has changed over the past couple of weeks, and the downwards pressure was given a strong boost the Federal Reserve’s more hawkish approach on rate cuts going forward. However, the end of the week saw the price recover to the point where Friday’s close was higher than the lowest weekly close a few weeks ago. The low of last week also did not exceed that recent low.

This currency pair often has very reliable trends, which is why I am interested in being short, so I would not worry too much about the long lower wick of last week’s candlestick.

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USD/JPY

The USD/JPY currency pair continued to rise firmly for the second consecutive week, as it made a bullish breakout to a new long-term high price on Thursday, while Friday saw a bearish retracement. This could be taken by trend traders as a signal to enter a long trade.

As mentioned, the US dollar is in a long-term bullish trend and was given a boost last Wednesday by the Federal Reserve taking a more hawkish tilt on rate cuts and inflation, but Friday’s weaker-than-expected US inflation-related data put a stop to that. However, there is no doubt that there is residual strength in the greenback.

The Japanese yen, as the other side of this currency pair, has weakened lately, especially after the Bank of Japan passed on a potential rate hike last week. I see this currency pair as a buy, as it tends to trend quite reliably over the long-term, especially as it reached a new multi-month high last week.

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NZD/USD

Last week, the NZD/USD currency pair printed a second consecutive large, strongly bearish candlestick, as it closed right on its low. It closed at a new two-year low, which would be a significant bearish breakdown in any asset.

The Australian dollar has got a lot of attention lately as it weakened to new long-term lows as the RBA passed on a rate cut. It is worth noting that the New Zealand dollar is also very weak, but even more so, making the New Zealand dollar attractive on the short side.

The New Zealand dollar was weakened by the recent 0.50% strong rate cut by the Reserve Bank of New Zealand, and again so last week by the much lower than expected GDP data, which will strengthen the case for further rate cuts over the foreseeable future.

This currency pair does not trend very reliably, so I don’t take long-term trades in it, but it certainly looks very weak right now.

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AUD/USD

Last week, the AUD/USD currency pair printed a very large, strongly bearish candlestick, as it closed not far from its low, although it should be noted that there is a lower wick. The pair closed at a two-year low, which may signal a significant bearish breakdown.

The Australian dollar has gotten a lot of attention lately, as it weakened to new long-term lows while the RBA passed on a rate cut.

This currency pair similarly does not trend very reliably, so I don’t take long-term trades in it, but it also looks rather weak at the moment. All the commodity currencies are performing very poorly, so one idea to partially diversify risk in Forex trading might be to be short of all of them against the asset you are bullish on.

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USD/CAD

Last week, the USD/CAD currency pair printed a large bullish candlestick, making a new four-year high while also showing a significant upper wick. The price action is basically bullish, no question about that, but it may take some time for the price to consolidate and work up enough momentum for a sustained breakout above the resistance level at $1.4375.

This currency pair also does not trend very reliably, so I don’t take long-term trades in it. However, it certainly looks very strong right now. The Canadian dollar is weak -- not due to anything in particular about Canada, but more due to a general weakness in all commodity currencies.

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Nasdaq 100 Index

Last week saw the Nasdaq 100 Index fall very strongly on Wednesday after the US Federal Reserve adjusted its pace of rate hikes to be slower throughout 2025, putting a bit of a hawkish surprise on the market. All the US indices fell, but it is worth noting that the Nasdaq 100 outperformed all the others, and the price action still shows a bullish trend pattern, with the price being supported at the 21,023 level.

There is a long-term bullish trend in this index, but it may be wise to wait for the price to close at a new record high before entering a new long trade for two reasons. Firstly, because the short-term price action is not strongly bullish, so we may have seen the peak for a while already. Secondly, because it is the year-end period which can see strange and volatile moves as institutions reposition, partly for changing forecasts, partly for tax reasons, which can make markets unpredictable.

I see the Nasdaq 100 Index as a buy, but only after closing above the 22,100 mark.

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Cocoa Futures

Cocoa futures have been rising powerfully over the past six weeks, as they rose to a new record high last week, before they fell back and gave up most of the week’s gain by the end of business on Friday. This turned the weekly candlestick into a pin bar, which may be a bearish sign.

However, trading commodities long when they break to new six-month high prices, especially when there is powerful momentum as there is here, has historically been a very profitable trading strategy, so there are plenty of good reasons to be long here.

During the second half of 2023 and the early months of 2024, the price increased by almost 600%, which is a meteoric rise. This happening so recently suggests that it could happen again, giving even more reason to be long here.

Additionally, cocoa is a super-food and is becoming better known for its health-giving properties when used in moderation. This is another factor which could be giving the price a tailwind. I see cocoa as a buy, but only following a daily close above the 12,565 mark.

I must point out that cocoa futures are very big, worth approximately $100,000, which is a dangerously large position size for most retail traders. Trading cocoa CFDs can be dangerous over the long-term as overnight swaps will usually be very high. Therefore, I urge retail traders to look into cocoa ETFs or ETCs, such as COCO, which own cocoa futures but can be purchased for only a few US dollars per share.

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Bottom Line

I see the best trading opportunities this week as follows:

• Short of the EUR/USD currency pair.
• Long of the Nasdaq 100 Index following a daily (New York) close above the 22,100 level.
• Long of cocoa futures, or a cocoa ETF/ETC, following a close above the 12,565 mark.

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