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Last week saw chances of a US rate hike at the next Fed meeting continue to decline, although the US dollar fell a little. Meanwhile, major US stock indices reached new record highs.

Fundamental Analysis & Market Sentiment

I previously wrote on Feb. 18 that the best trade opportunities for the week were likely to be:

1. Long of the Nasdaq 100 Index following a daily close above 17962. This did not set up.
2. Long of the S&P 500 Index following a daily close above 5030. This did not set up.
3. Long of Bitcoin following a daily close above $52,161. This did not set up.
4. Long of cocoa futures following a close above 5800. This set up on Wednesday with a close at 5861, and Friday’s close saw a rise of 6.74% from that point.

The overall result was a win of 6.74%, resulting in a gain of 2.25% per asset.

Last week saw slightly higher directional volatility in the Forex market, as only 7% of the significant currency pairs and crosses fluctuated by more than 1%. Volatility has been relatively low ever since 2024 began. There was important action seen in US stock markets. Last week saw the benchmark S&P 500 Index, the Nasdaq 100 Index, and the Dow Jones 30 Index reach new, all-time high prices.

This rise in stock markets occurred despite the CME’s FedWatch tool showing strongly lowering expectations of a March rate cut by the Federal Reserve. Markets now see only a 4% chance of a rate cut in March, down from 10% one week ago. 25% expect some kind of a rate cut at the subsequent meeting in May, down from 38% last week.

Last week's agenda was very light, as it was dominated by US FOMC Meeting Minutes, Canadian CPI (inflation), and Minutes of the last meeting of the Reserve Bank of Australia.

The FOMC Meeting Minutes showed that Fed members were in no rush to hike rates and wanted to see more progress on inflation heading to 2% before cutting any further.

Canadian CPI data showed that inflation fell faster than expected last week, from an annualized rate of 3.4% to 2.9%. This is seen as potentially moving the Bank of Canada towards a more dovish position, and so this might have contributed to a small decline in the Loonie. The RBA Minutes contained no surprises, and the Aussie barely reacted to the release.

There has been another sign that US inflation is more persistent than was expected, with the Core Personal Consumption Expenditures Price Index rising by 0.1% over the past month. Additionally, there were a few other important economic data releases last week:

1. Australian Wage Price Index – this came in exactly as expected.
2. US Unemployment Claims – this came in slightly better than expected.
3. Flash Manufacturing & Services PMI – broadly, Services data was better than expected while Manufacturing was worse.

The Week Ahead: Feb. 26 - March 1, 2024

The most important items over the coming week will be the US Core PCE Price Index and Advance GDP data. Next week has a relatively light data schedule. Other major economic data releases this week will be, in likely order of importance:

1. US CB Consumer Confidence
2. Australian CPI
3. Reserve Bank of New Zealand Official Cash Rate and Monetary Policy Statement
4. German Preliminary CPI
5. Canadian GDP
6. US Unemployment Claims
7. US ISM Manufacturing PMI
8. China Manufacturing PMI

Monthly Forecast for February 2024

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I made no monthly forecast for the month of February, as there was no obvious, long-term trend to be seen in the US dollar that could be relied upon at the start of the month.

Weekly Forecast for Sunday, Feb. 25, 2024

Last week, I made no weekly forecast, as there were no strong, counter-trend price movements in any currency crosses, which is the basis of my weekly trading strategy. I once again will provide no forecast this week for similar reasons.

As previously mentioned, directional volatility in the Forex market rose slightly last week, as 7% of the most important currency pairs fluctuated by more than 1%. Volatility is likely to increase over the coming week, as such a low level of volatility is unusual to see for more than a few weeks.

Last week saw relative strength in the New Zealand dollar, and relative weakness was seen in the Japanese yen.

Key Support/Resistance Levels for Popular Pairs

Technical Analysis - US Dollar Index

The US Dollar Index printed a candlestick that closed below its open last week, but it is arguably a bullish pin bar. However, the weekly close presented a mixed, long-term trend, as it was up on the price of three months ago but down compared to the price of six months ago.

Direction looks uncertain due to the unclear trend, but there may be short-term, bullish momentum, especially as market expectations of rate cuts continue to decline. It may be wise to trade currency crosses not involving the greenback, or other asset classes away from Forex.

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Nasdaq 100 Index

The Nasdaq 100 Index rose last week to trade at a new record high price before giving up some of its gains on Friday. The weekly candlestick shown in the price chart below is more bullish than bearish, but it is worth noting that the weekly close was not the highest weekly close made.

Although the expectation that the Fed will cut rates soon continues to decline, which would logically be a drag on US stock markets, the long-term, bullish momentum in stocks cannot be ignored. It may be wise to look for a long trade following a bounce at the nearest support level or a daily close above 17962.

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S&P 500 Index

The S&P 500 Index closed higher last week after making a new record high, printing an unquestionably bullish candlestick which ended the week more strongly than the Nasdaq 100, suggesting a relative weakness in technology stocks.

I see the S&P 500 Index as a buy, as it continues to advance firmly into bullish blue sky, despite the growing expectation the Fed will not cut rates in either March or May.

Another reason the long-term outlook is bullish is that its first break to a fresh all-time high, as happened just a few weeks ago, has historically generated an advance of a median of 13% over the following year. Traders and investors should seriously consider going long here.

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Bitcoin

Bitcoin made a firm bullish breakout three weeks ago, but it has made a narrow consolidation just below $53,000 over the past week after printing a new 20-month high.

I see Bitcoin as a buy, given legs by the recent approval of Bitcoin ETFs, which attracts more retail investment, although it will quite likely be best to wait for a new bullish breakout or a bounce at a key support level before doing so.

I would wait until we get a daily close above the high closing price of $52,161 before entering a new long trade here.

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AUD/USD

I had expected that the level at $0.6590 might act as resistance in the AUD/USD currency pair last week, as this price has acted previously as both support and resistance. Note how these “role reversal” levels can work well.

The H1 price chart below shows how the price rejected the resistance level right at the start of last Thursday’s London session with a pin bar which is also a near-doji, signalling the timing of this bearish rejection. This trade was profitable, giving a maximum reward-to-risk ratio of more than 3 to 1 based on the entry candlestick.

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USD/JPY

I had expected that the level at JPY149.70 might act as support in the USD/JPY currency pair. The H1 price chart below shows how this level was rejected not long after the start of last Tuesday’s New York session, marked by the upward arrow, signalling the timing of this bullish rejection. The beginning of the New York session can be a great time to trade major currency pairs such as this one, which is also part of the overlap of the London/New York session.

This trade was nicely profitable, giving a maximum reward-to-risk ratio of more than 4 to 1 based on the size of the entry candlestick.

Note that the yen has been showing some relative weakness, so this currency pair and others may be good vehicles to take advantage of. The Bank of Japan wants to move away from the well-established, ultra-loose monetary policy but will find it hard to do so this year, leading to a weaker yen.

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NZD/JPY

Last week saw the the NZD/JPY currency cross rise strongly to close very near its high price, which is the highest price that this currency cross has reached in over nine years. These currency crosses have not typically trended very reliably, but this one is worth paying attention to for two reasons:

1. The Japanese yen has been suffering from prolonged weakness as the Bank of Japan wishes to escape from its long-term, ultra-loose monetary policy, but economic data released recently has suggested the Bank will be unable to do this any time soon. This has caused a bearish trend in the Japanese yen, which has generally been the weakest major currency.
2. The New Zealand dollar is one of the strongest major currencies, due partially to its relatively high interest rate of 5.50%.

Note that this currency cross can be a perfect vehicle for a carry trade, as it will pay a relatively strong positive swap, while also trending higher. The price chart below shows a long-term, bullish price channel, which gives some weight to a bullish outlook here.

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Cocoa Futures

Cocoa futures have been in a strong, bullish trend for well over a year now. Last week, the price rose very strongly to reach another new, multi-year high price yet again. The price chart below applies linear regression analysis to the past 75 weeks, and it shows graphically what a great opportunity this has been on the long side over the long-term. The price is up by about one third in less than two months, and has doubled in value just since last June.

There are two things especially worth noticing here:

1. The price is quite far above the linear regression channel.
2. Volatility is extremely high, and cocoa has been getting a lot of media attention.

These factors suggest a strong dip may be likely to happen soon, making it dangerous to enter a long trade without consideration here. Trading commodities long on breakouts to new six-month highs has been a profitable strategy over recent years, so I see this as a buy because Friday’s daily close was very near the high.

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Bottom Line

I see the best trading opportunities this week as:

1. Long of the Nasdaq 100 Index following a daily close above 17962.
2. Long of the S&P 500 Index.
3. Long of Bitcoin following a daily close above $52,161.
4. Long of cocoa futures, but only with a small (half size) position size.

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More By Daily Forex:

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