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Fundamental Analysis & Market Sentiment

I previously wrote on Sunday, June 16 that the best trade opportunities for the week were likely to be:

1. Long of the Nasdaq 100 Index. This produced a gain of 0.54%.
2. Long of the S&P 500 Index. This produced a gain of 0.62%.
3. Long of the CHF/JPY currency cross. This produced a gain of 1.09%.
4. Long of the NZD/JPY currency cross. This produced a gain of 1.16%.

The overall result was a net gain of 3.41%, resulting in a loss of 0.85% per asset. Meanwhile, last week’s key takeaways were:

1. Falling inflation in the UK, with CPI coming in as expected at only 2.0% annualized, finally reaching the Bank of England’s inflation target. However, this rate was widely expected by the market, so it had no dramatic impact upon the value of the British pound, although the pound did lose ground last week. This was almost certainly helped by a feeling that the CPI data makes earlier rate cuts possible.
2. The Swiss National Bank held a policy meeting and announced a cut in its policy rate from 1.50% to 1.25%. This was unexpected, and it sent the Swiss franc lower.
3. The Bank of England voted exactly as expected to leave rates on hold, so the market reacted little to this policy meeting. The relative value of the pound seemed to be affected more by declining inflation.
4. The Reserve Bank of Australia held a policy meeting at which it left its Cash Rate unchanged. However, the Bank left the possibility of a further rate hike open within the near- to medium-term, which seems to have firmed up the Aussie somewhat.

Another key event is the continuing strong showing by far-right parties in polls concerning the general election in France following the far right’s victory there in the European Parliament elections. Although the major far right party is no longer in favor of exiting the European Union, the euro is looking weak partly due to concerns over the political outcome.

Other important data releases last week were:

1. US Retail Sales – this came in lower than expected, showing a month-on-month increase of only 0.1%, suggesting a trend that US consumer demand is weakening.
2. US, German, UK, French Flash Services & Manufacturing PMI – the US data was a little higher than expected, while the European data was worse than expected, suggesting output is stronger in the US.
3. US Empire State Manufacturing Index – this came in slightly better than expected, reinforcing my point in 1. above.
4. New Zealand GDP – this came in a fraction better than expected, showing a quarterly growth of 0.2%.
5. UK Retail Sales – the data was surprising, showing much stronger growth than was expected.
6. US Unemployment Claims – this came in almost exactly as expected.

The Week Ahead: June 24-28, 2024

The most important item over this coming week will be the release of US Core PCE Price Index data, which is the Fed’s favorite inflation indicator and is therefore closely watched. It is expected to show a month-on-month increase of 0.1%. If the actual data release lower, that could see a lower dollar and higher stock markets, and vice versa if higher.

Also in the US, there will be a release of Final GDP data which is expected to show annualized growth of 1.4%. A different number at the actual release could move the dollar and stocks to some extent. There will also be significant releases of Canadian and Australian CPI data, both of which are expected to show declines.

Other major data releases due this week are:

1. US CB Consumer Confidence
2. US Revised UoM Consumer Sentiment
3. Canadian GDP
4. US Unemployment Claims
5. US Pending Home Sales

It should be noted that Thursday will be a public holiday in New Zealand.

 

Monthly Forecast for June 2024

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In Forex, I follow the US dollar’s long-term trend to make monthly forecasts. However, just as last month showed no clear trend in the US dollar, so too did this month. Thus, I once again will not provide a forecast for this month.

Weekly Forecast for Sunday, June 23, 2024

Last week, I made no weekly forecast, as there were no unusually large swings in any Forex currency crosses present, which is the basis of my weekly trading strategy. I once again make no weekly forecast, as this situation is unchanged.

Directional volatility in the Forex market fell fractionally last week, with 30% of the most important currency pairs fluctuating by more than 1%. Last week, the Australian dollar showed relative strength, while the Japanese yen showed relative weakness.

Key Support/Resistance Levels for Popular Pairs

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Technical Analysis - US Dollar Index

The US Dollar Index printed a bullish, near pin bar candlestick last week, which closed just above the previous week’s high. The price managed to get established above the former resistance level at 105.28.

There is a bullish long-term trend present, as the price is above its levels from three months ago and its price of six months ago. This trend is now looking more solid. However, bulls really need to generate a sustained breakout beyond 106.00 before we will see truly strong technical bullishness here.

It may make sense to trade the US dollar long now, but I will feel much more comfortable doing that once we start getting daily closes of this Index above 105.80, a bit below 106.00. I see the dollar as a bit of a sideshow right now, with the Forex market currently driven by weakness in the Japanese yen and the Swiss franc.

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GBP/USD

The GBP/USD currency pair declined again last week, dragged lower by a general decline in European currencies, such as the Swiss Franc after its surprise rate cut, and the Euro, which is suffering from opinion polls suggesting that the far-right parties may take power in the forthcoming French Parliamentary election.

Technically, the price chart below shows topping price action, with the price clearly rejecting the big quarter-level at $1.2750 over the previous weeks. The large, bearish engulfing pin bar two weeks ago dominates the chart. Last week saw a continuing decline, but there is an area of strong support based on the round number at $1.2600 which could halt the move lower.

We may see a further decline if the price can get well established below $1.2600.

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USD/JPY

The USD/JPY currency pair printed a strongly bullish candlestick last week which made a record high weekly close, closing right on the high of its range. The closing price was only about 30 pips below the multi-decade high price we saw in April.

The Japanese yen has been showing real long-term weakness, as the Bank of Japan continues to stall on changing its ultra-loose monetary policy.

The US dollar has become a better currency to use on the long side to exploit the yen’s weakness, as the US dollar has broken beyond a key resistance level over the past week. However, there are other yen crosses which it may be better to be long of.

Long trades may work out well here over the coming week. However, bulls need to beware potential sudden intervention by the Bank of Japan, or profit taking when the key psychological levels such as JPY160.00 or the high at JPY160.21 are reached.

As a trend trader, I am very happy to be long of this currency pair. 

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AUD/JPY

I had expected that the AUD/JPY currency cross would have potential support at the JPY103.73 level. The H1 price chart below shows how this support level was rejected right at the end of last Monday’s Tokyo session by an engulfing bar, marked by the upward arrow, signaling the timing of this bullish rejection.

This can be an excellent time of day to enter a trade in a currency cross involving the Japanese yen such as this one. The AUD/JPY currency pair is one of the most volatile Forex pairs, so trading can offer a lot of pips in profit.

This trade has been nicely profitable, giving a maximum reward-to-risk ratio of approximately 4 to 1. There is strong bullish momentum here, as the two currencies were respectively the largest gainer and loser last week. It may be wise to be long here as the price is trading at a long-term high, and the price rose by almost 2% over the past week, showing momentum.

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CHF/JPY

The CHF/JPY currency cross rose firmly during the week, continuing its strong, long-term bullish trend as it reaches new long-term high prices. However, it is worth noting that due to fresh weakness in the Swiss franc following the SNB’s surprise rate cut, the price ended the week somewhat off its high.

There is weakness in the Japanese yen, which is the major defining feature of the Forex market right now. This is a good reason to be short of the Japanese yen. However, it might be better to do that with other currencies than the Swiss franc right now.

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NZD/JPY

The NZD/JPY currency cross rose firmly last week to reach a new multi-year high price. The price ended the week only slightly below its high, which is a bullish sign.

This currency cross could be a good vehicle to use to take advantage of any yen weakness over the coming week, although the Australian cross looks even better. However, we see a symmetrical bullish price channel here, which is another bullish sign of reliability of the trend. We also see the start of a bullish breakout above this channel, which is yet another bullish sign.

When trading this cross, it helps to check support and resistance levels in the USD/JPY and NZD/USD currency pairs to be sure the price can rise or fall relatively easier. A long trade above last week’s high price could work well over the coming week.

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USD/ZAR

The USD/ZAR currency pair broke down last week to reach a new 10-month low. The weekly candlestick in the price chart below is quite large, and the price ended the week near the low of its range – these together are bearish signs. Technically, the price is showing bearish momentum and looks likely to continue lower to at least 17.60.

The reason for the strong performance by the South African rand is mostly the new South African government, which, for the first time since democracy in 1994, includes parties other than the ANC, all of which have economic policies preferred by the markets. The market is now hoping for a somewhat different economic approach and less corruption in government, leading to a stronger rand.

I see a potential short trade opportunity here targeting the 17.60 level if we get a bearish reversal at 18.18 to 18.25, which is likely to be an area of firm resistance.

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Nasdaq 100 Index

The Nasdaq 100 Index reached a new all-time high last week above the huge, round number of 20,000. However, the price fell towards the end of the week as the US dollar advanced.

The weekly candlestick looks quite bearish, as it is a bearish pin bar rejecting the 20,000 area. This suggests there was strong profit-taking at this level, before the price fell by about 300 points or so. However, this is not a large drop, and the price remains relatively close to the high made earlier in the week.

It makes sense to be bullish on this major stock market index when it has recently made a new record high. Historic precedent shows this tends to produce further gains quickly. However, it will be prudent to wait for a daily close above 20,000 to prove that bulls truly seem to be in control.

Therefore, I see the Nasdaq 100 Index as a buy following a daily close above 20,000.

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S&P 500 Index

The S&P 500 Index reached a new all-time high last week. However, the price fell towards the end of the week as the US dollar advanced. The weekly candlestick looks bearish, as it is a semi pin bar rejecting the high price. However, this was not a large drop, and the price remains relatively close to the high made earlier in the week.

It makes sense to be bullish on this major stock market index when it has recently made a new record high, similar to the Nasdaq. However, it will be prudent to wait for a new record high daily close above the round number at 5,500 to prove that bulls truly seem to be in control.

Therefore, I see the S&P 500 Index as a buy following a daily close above 5,500.

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Bottom Line

I see the best trading opportunities this week as follows:

1. Long of the USD/JPY currency pair.
2. Long of the AUD/JPY currency cross.
3. Long of the NZD/JPY currency cross following a daily close above JPY97.79.
4. Short of the USD/ZAR currency pair following a rejection of the resistance area at 18.18 to 18.25, targeting 17.60.
5. Long of the Nasdaq 100 Index following a daily close above 20,000.
6. Long of the S&P 500 Index following a daily close above 5,500.

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More By This Author:

Weekly Forex Forecast - Sunday, June 16
AUD/USD Forex Signal: 3-Week Consolidation Continues
EUR/USD Forex Signal: Found Support At $1.0758