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Fundamental Analysis & Market Sentiment

I previously wrote on July 14 that the best trade opportunities for the week were likely to be:

1. Long of the EUR/USD currency pair following a daily close above $1.0920. This trade set up on Wednesday and gave a loss of 0.53%.
2. Long of the GBP/USD currency pair. This pair fell over the past week by 0.58%.
3. Long of the S&P 500 Index following a daily close above 5,634. This trade set up on Monday and gave a loss of 2.86%.

The overall result was a net loss of 3.97%, giving an average return of -1.32% per trade. Meanwhile, last week’s key takeaways were:

1. Inflation data was released in the UK, Canada, and New Zealand. The data in Canada and New Zealand showed slightly stronger-than-expected falls in the rate of inflation, which is good news for stocks globally. Still, the UK data showed inflation coming in a fraction higher, albeit no higher than the target rate of 2%.
2. Fed Chair Jerome Powell said the US economy was on a deflationary path, and shortly after, the S&P 500 Index closed at a new record high. However, it spent the rest of the week selling off strongly.
3. The European Central Bank left its Main Refinancing Rate unchanged at 4.25%, as was widely expected. The ECB has stopped giving forward guidance, leaving analysts guessing about a possible rate cut in September.
4. US Retail Sales data came in slightly higher than expected, suggesting that US consumer demand may be slightly stronger than expected despite the slowing economy.

There were a few other events last week which were of lower significance, including:

1. US Empire State Manufacturing Index – this came in slightly lower than expected.
2. UK Retail Sales – this came in much worse than expected.
3. Canadian Sales – this was also strongly worse than expected.
4. Australian Unemployment – the rate remained unchanged, but net new jobs were higher than expected.
5. UK Unemployment Claims – this came in slightly worse than expected.
6. US Unemployment Claims – this was marginally worse than expected.

The Week Ahead: July 22-26, 2024

The most important items over this coming week will be:

1. US Core PCE Price Index.
2. US Advance GDP.
3. Bank of Canada Overnight Rate, Rate Statement, and Monetary Policy Report. The Bank is expected to cut its Overnight Rate from 4.75% to 4.50%.
4. US Unemployment Claims.
5. US, German, UK, French Flash Services & Manufacturing PMI.

Monthly Forecast for July 2024

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This month, I forecasted that the USD/JPY currency pair would increase in value. The performance of this forecast to date is as follows:

Weekly Forecast for Sunday, July 21, 2024

Last week, I made no weekly forecast. Although there were some large directional movements in the NZD/JPY and EUR/NOK currency crosses, I had little faith that these would reverse over the coming week, so I did not want to take these trades. This was a great call, as both would have been losers.

Last week, the NZD/JPY currency cross experienced an unusually large directional price movement. However, I do not have faith that the price will revert over the coming week, so I once again make no weekly forecast.

Directional volatility in the Forex market fell slightly last week, as 41% of the most important currency pairs fluctuated by more than 1%. Over this past trading period, the Swiss franc was the strongest major currency, while the Australian dollar was the weakest.

Key Support/Resistance Levels for Popular Pairs

Technical Analysis - US Dollar Index

The US Dollar Index printed a bullish candlestick last week, closing near the top of its range. This is a sign of short-term bullish momentum. However, bulls could not push the price into the zone of strong resistance between 103.92 and 104.15. Another bearish factor—a strong one—is that the greenback is now well established within a long-term bearish trend, being below its levels of both three months ago and six months ago.

I see the US dollar as ripe for a bearish turnaround at the recent price area. Once we start to see some kind of convincing bearish reversal in the price action, a trade against the US dollar over the coming week could be a good idea.

Alternatively, if the US dollar could establish itself above 104.15 over the coming days, that would be a bullish sign and likely a signal to stop shorting the dollar.

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EUR/USD

The EUR/USD currency pair advanced quite strongly at the start of last week to mark the highest daily close in three months. The close was near the top of the day's range at the breakout, and the closing price was above the technically significant level of $1.0920.

For these reasons, many trend traders took a long trade entry here. However, the price turned bearish by failing to rise above the nearby resistance level at $1.0945, which lowered the price. The downward move then got a tailwind by increasing strength in the US dollar towards the end of the week.

Trend traders might still be involved on the long side until the price breaks below $1.0800 or the support level nearby at $1.0833. However, given that last week's candlestick, shown in the price chart below, is a bearish pin bar, it may not be wise to be long here. Zooming out, the long-term price action is quite consolidative, which might be another reason not to be in a trade here.

I will enter a long trade if we get a daily close this week above $1.0939. This is not likely to happen, however.

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USD/CHF

I previously expected to see the USD/CHF currency pair maintaining potential support at $0.8820. The H1 price chart below shows how an engulfing bar, marked by the upward arrow, rejected this support level right at the start of last Thursday's Tokyo session, signalling the timing of this bullish rejection.

This trade could still be open, but so far, it has given a maximum reward-to-risk ratio of approximately 3 to 1.

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XAU/USD

Gold advanced quite strongly at the start of last week to reach a new record high well above $2,450. However, the price then broke down quite strongly over the rest of the week, so the weekly candlestick ended up as a bearish pin bar.

Although this price action can be seen as a bearish development, it is worth noting that the decline has not been very large and that a support level just below $2,400 succeeded in holding the price up during the final hours of last week's market.

The price of gold may well continue to fall as the new week gets underway, but if the support level holds and the price rises again to make a daily close above $2,468, I will enter a long trade.

Most trend traders will likely remain long here, but it is potentially unwise to enter a new long trade without the price making a significant high first.

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S&P 500 Index

The S&P 500 Index reached a new all-time high last week after rising firmly during the first part of the trading period. However, we then saw a strong selloff over the latter days of the week -- one so strong that the price fell by more than three times the long-term average true range, which is enough for most trend traders to exit a long trade.

While the US stock market has a way of bouncing back, the price action here suggests a major bearish reversal. The weekly candle is a bearish outside candle that closed very near the low of its range.

The US stock market has risen strongly recently, so we may be overdue for a fairly strong correction. Alternatively, the price might bounce back. There is much talk about a rotation away from tech stocks. It is true the Nasdaq 100 Index performed even worse last week, but we can still see the broader stock market also selling off.

The best strategy here seems to be remaining on the sidelines and only getting involved on the long side if we get a strong rebound ending in a new record-high daily close.

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Nasdaq 100 Index

The Nasdaq 100 Index sold off strongly last week, after making and then rejecting a record high during the previous week with a bearish doji candlestick.

While the US stock market has a way of bouncing back, the price action here suggests a major bearish reversal. The weekly candle is large and bearish, and it closed very near the low of its range. The weekly decline was the worst seen since April.

As previously mentioned, the US stock market has risen strongly recently, so we may be overdue for a fairly strong correction. Alternatively, the price might bounce back. There is much talk about a rotation away from tech stocks. Technology stocks have performed poorly over the past two weeks after going on a record run.

The best strategy here similarly seems to be remaining on the sidelines and only getting involved on the long side if we get a strong rebound ending in a new record-high daily close. I do not think that this is a likely scenario, however.

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Bottom Line

I see the best trading opportunities this week as follows:

1. Long of the EUR/USD currency pair following a daily close above $1.0939.
2. Long of XAU/USD (gold) following a daily close above $2,469.
3. Long of the S&P 500 Index following a daily close above 5,668.

More By This Author:

AUD/USD Forex Signal: Bullish Double Bottom Formed At $0.6721
Forex Today: Gold Makes New All-Time High Above $2,480
AUD/USD Forex Signal: Very Bullish Above $0.6755