Fundamental Analysis & Market Sentiment

I wrote on 29^th December that the best trade opportunities for the week were likely to be:

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The weekly loss of 0.79% equals 0.26% per asset.

Last week saw a more active market as the Christmas holiday came to an end; the very few key takeaways were:

1. US ISM Manufacturing PMI was better than expected, suggesting the US economy is still buoyant.
2. US Unemployment Claims – a fraction better than expected.
3. Chinese Manufacturing PMI – a small fraction worse than expected.

Last week saw continued risk-off sentiment, with particular fears of President-Elect Trump’s recent tariff threats and of slowing growth data in many G20 nations. However, towards the end of last week, there was a recovery in risk sentiment. However, two US Fed members made hawkish comments over the weekend about inflation not yet being under control, which may boost the US Dollar and weaken US stocks when markets open Monday.

The British Pound and Euro are notably weak in the Forex market, while the US Dollar and the Japanese Yen are strong.

There was little high-impact data last week, but there will be this coming week, so markets will probably be much more active now that the seasonal holiday is over.

The Week Ahead: 6^th – 10^th January

The coming week has a much fuller schedule, so we are very likely to see increased market activity and volatility.

The coming week’s important data points are:

1. US Average Hourly Earnings
2. US FOMC Meeting Minutes
3. US Non-Farm Payrolls
4. US JOLTS Job Openings
5. US ISM Services PMI
6. German Preliminary CPI (inflation)
7. Australian CPI (inflation)
8. Swiss CPI (inflation)
9. US Unemployment Claims
10. US Unemployment Rate
11. Canadian Unemployment Rate

Monday is a public holiday in Italy.

Monthly Forecast January 2025

For the month of December, I forecasted that the EUR/USD currency pair would fall in value. The final performance of my forecast was:

For January, I forecasted that the USD/JPY currency pair would rise in value and that the EUR/USD currency pair would fall in value

Weekly Forecast 5^th January 2025

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

The Japanese Yen was the strongest major currency, while the Euro was the weakest. Volatility was much higher last week, with 30% of the most important Forex currency pairs and crosses changing in value by more than 1%. It is likely to increase again this week.

You can trade these forecasts in a real or demo Forex brokerage account.

Key Support/Resistance Levels for Popular Pairs

Technical Analysis

US Dollar Index

Last week, the US Dollar Index again printed a bullish candlestick that continued toward the long-term bullish trend, bullishly breaking out to make its highest close in more than 2 years. 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. The breakout was from an inside bar, which suggests that momentum could be good. On the other hand, the weekly candlestick has a significant upper wick, which shows the Dollar has already given back some of its gains.

I have plenty of fundamental reasons to be bullish on the US Dollar after the Federal Reserve’s hawkish tilt three weeks ago, which took markets by surprise and triggered a rise in the greenback and a sharp selloff in stocks, while US treasury yields rose. Comments from two Fed members over the weekend that inflation is still not under control could also produce hawkish sentiment towards the greenback and push the price higher still, stoking bullish momentum here.

Overall, the Dollar is more likely to rise than fall over the coming week. The price has room to rise to at least the next resistance level at 110.00.

EUR/USD

The EUR/USD currency pair is 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, but for almost three weeks after plunging to a new long-term low price well below $1.0400, the price consolidated without turning definitively bearish.

This has changed over the past three weeks, and the past week finally saw a further significant breakdown. The Euro suddenly weakened, although it is not obvious why. The price traded below $1.0225 for a time, its lowest price in more than two years.

This currency pair often has very reliable trends, so I am interested in being short, especially after last week’s breakdown, which has it now trading in “blue sky”.

USD/JPY

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The USD/JPY currency pair did not rise last week, although the fact that the entire week was a public holiday in Japan was significant. However, the souring risk sentiment in global markets has boosted the Japanese Yen to begin acting as a safe haven again, and recent weeks have seen Japanese monetary policy as a stronger driver of the price.

I still see this currency pair as a buy, as it tends to trend quite reliably over the long term, but I have less confidence in this trend than I do in the bearish trend in EUR/USD because the price here is still well below a relatively recent peak.

Another factor lowering my confidence in the bullish trend is that the Bank of Japan will eventually start implementing a more hawkish monetary policy. When that finally really starts to happen with the Bank of Japan’s next rate hike, the price will be very likely to start moving down, so the trend is vulnerable to policy.

USD/CAD

Last week, the USD/CAD currency pair printed another bullish candlestick, closing near its high, but the price did not quite make a new 2-year high. A look at the weekly chart below shows that the bullish momentum has been strong here since October, and the trend here has been stronger and clearer than any other trend in the Forex market, which does not often happen in this currency pair as the US and Canadian economies do not tend to be divergent.

The story is really about US economic success and a more hawkish Fed boosting the greenback, while Canada is dealing with several problems right now, both financial and political, which are feeding through to make a weaker Loonie.

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. All the commodity currencies except maybe the Australian Dollar are looking very weak right now, so it might be an idea to use the CAD and the NZD together as the short component of any Forex trades you are making this week, or at least part of the short component by creating a basket. For example, if you were short two lots of EUR/USD, you might also be one lot of USD/CAD long.

Of course, early January can cause strange and volatile price movements in the Forex market that can end trends quickly, so keep an eye out for that.

NZD/USD

Last week, the NZD/USD currency pair printed a fifth consecutive bearish candlestick, closing not far from its low. It closed at a new 2-year low, a significant bearish breakdown in any asset. However, the candlestick was small, suggesting that momentum may have slowed, although it was a holiday week, so the market was slow.

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. The Aussie has gotten a bit stronger, but for a few weeks, I have been talking about weakness in all the commodity currencies, notably the Canadian Dollar and the Kiwi.

Bottom Line

I see the best trading opportunities this week as:

• Short of the EUR/USD currency pair.
• Long of the USD/JPY currency pair.

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