The difference between success and failure in Forex trading is very likely to depend upon which currency pairs you choose to trade each week, and not on the exact trading methods you might use to determine trade entries and exits. Of course, the current market environment is partly one of crisis, with price movements generally dominated by the economic impact of the coronavirus pandemic and the changed environment it has imposed upon monetary policies and trade. These are the dominant factors to consider in trading any market today.
Big Picture 24th May 2020
In my previous piece last week, I forecasted that the best trade was likely to be long of Gold in U.S. Dollar terms following a daily close above $1742. We got such a close last Tuesday, but the price ended the week down by 0.45% from that entry point, so this was not a profitable trade.
Last week’s Forex market saw the strongest rise in the relative value of the New Zealand Dollar and the strongest fall in the relative value of the Japanese Yen.
Fundamental Analysis & Market Sentiment
The world is not coming to an end, but we are living in an extraordinary time of global health crisis, the type of which has not been seen in one hundred years. There is both fear and optimism, but it is important to remember that the evidence shows that the vast majority of people are going to survive and be healthy.
Recent days have seen daily new confirmed coronavirus cases hit new all-time highs. This is a sign that globally, the wave of disease is not dying down yet.
We see the epicenter of the global coronavirus pandemic move into Latin America. The rolling averages of deaths and new cases has finally begun to decrease significantly in the U.S.A. as a whole and in the U.K., which has recorded more deaths than any other country in Europe. European nations are beginning to relax restrictions, as is the U.S.A. in a patchy way.
Most OECD nations are now past the peak the of their first waves of coronavirus and have either begun to relax restrictions or are close to doing so.
Latin America and the Caribbean are now responsible for approximately 40% of confirmed new daily deaths, with the U.S.A. at about 30% and Europe at barely more than 20%. Brazil has more total confirmed cases now than any other country except the U.S.A. The strongest exponential growth in new confirmed cases is happening in India, Brazil, Mexico, and Peru.
The U.S. stock market rose last week, closing above its 61.8% Fibonacci retracement level from the all-time high to the recent low. This is a bullish sign for stock markets, suggesting that markets are somehow either setting aside the impact of the virus or believe the ultimate economic damage will be lower than has been supposed.
Headline economic data is very bad. U.S. GDP shrank by 4.8% in the first quarter of 2020. U.S. unemployment nationwide is currently confirmed at 14.7%. New unemployment claims in the U.S. have hit 50 million over only the past two months. Inflation is negative, at -0.8%. Many analysts see this ongoing stock market rise as bound to collapse.
It is clear that as many countries seek to relax coronavirus-related restrictions to get their economies moving again, they will be hoping to be able to keep relaxing to try to secure strong economic rebounds. The only given is that employment and GDP generally will take severe hits, with Goldman Sachs forecasting a 34% drop in U.S. GDP in the second quarter of 2020. The stock market crash we have seen was comparable to 2008 and even 1929 so far. In fact, the speed of the initial drop of 20% from the all-time high price took only 15 market days to happen, compared to 30 days in 1929.
It seems clear that we will see a continuing level of relatively high market volatility, at least in the stock market.
It has become clear that those countries which have fared best with their first waves of coronavirus are smaller nations such as Denmark, Norway, Greece, Austria, Denmark, Israel, and the Czech Republic. They are discussing creating a joint travel zone for commerce and tourism without quarantine.
Technical Analysis
U.S. Dollar Index
The weekly price chart below shows last week printed a relatively bullish candlestick (by its position more than its direction) which was held up quite precisely by the support level at 12470 shown in the price chart below. There is a long-term bullish trend reflected in the fact that the price is higher over both 3 and 6 months, with volatility looking healthy. Overall, next week’s price movement in the U.S. Dollar looks likely to be up.
S&P 500 Index
The major U.S. stock market index the S&P 500 Index – the biggest market index in the world – rose last week and closed above the the 61.8% Fibonacci retracement level at 2937 of the market’s recent peak to trough move. The price area between about 2900 and 3000 is highly likely to be pivotal, but recent developments are definitely bullish.
If this coming week closes up, especially if the close is above 3000, this would be a bullish sign that the crash is likely to be over.
If this coming week sees a firm downwards turn and closes above 2800, this would be a bearish sign that the crash is still playing out and the price has much more room to fall.
XAU/USD (Gold)
The Gold weekly chart has printed a doji candlestick rejecting the $1750 area and reversing from the new multi-year highs that it made above this level. This could be the start of a bearish reversal but is more likely to be a pullback in a bullish trend. We have a long-term bullish trend which is still valid. I expect the price may break to new highs over the coming week, so I would wait for a daily (New York close) above $1750 an ounce before entering any long trade but I will be very happy to enter a long trade if it sets up.
EUR/USD
The weekly price chart below shows that the price has spent the past nine weeks consolidating. Although a breakout is likely at some point, it may be worth looking for short trades from reversals at about 1.1000 or long trades from reversals at about 1.0750, taking advantage of this range while it holds.
Bottom Line
This week I forecast the best trades are likely to be:
- Long of Gold in U.S. Dollar terms following a daily (New York) close above $1750 per ounce.
- Short of the S&P 500 Index following a daily close below 2800.
- Long of the S&P 500 Index following a daily close above 3000.
- Short of EUR/USD following a bearish reversal at 1.1000.
- Long of EUR/USD following a bullish reversal at 1.0750.