The difference between success and failure in Forex trading is very likely to depend mostly upon which currency pairs you choose to trade each week and in which direction, and not on the exact trading methods you might use to determine trade entries and exits.
When starting the trading week, it is a good idea to look at the big picture of what is developing in the market as a whole and how such developments and affected by macro fundamentals and market sentiment.
It is a good time to be trading markets right now, as there are many valid strong trends in favor of stocks and riskier assets and against the U.S. dollar.
Big Picture 27th December 2020
In my previous piece last week, I saw the most attractive trade opportunities as long of the EUR/USD and AUD/USD currency pairs. The EUR/USD currency pair closed down over the week by 0.60% while the AUD/USD currency pair fell by 0.36%, so this call produced an averaged loss of 0.48%.
Last week’s Forex market saw the strongest rise in the relative value of the U.S. dollar and the strongest fall in the relative value of the Swiss franc. There is still a valid, long-term, strong trend against the U.S. dollar, meaning it is an attractive time to be trading Forex, as the greenback is the prime driver of the Forex market.
Fundamental Analysis & Market Sentiment
The headline takeaway is that we are seeing a continuing long-term positive trend in stock markets and in riskier currencies such as the British pound, the euro and the Australian dollar, plus a strongly negative trend in the U.S. dollar over the long term. However, we saw a recovery last week by the U.S. dollar which produced a dip in all these trends. The retracement is relatively small, and risk-on sentiment is still quite firm, with the prospect of effective mass vaccinations against coronavirus in view. There probably would have been a bullish move against the dollar last week if President Trump had signed a new stimulus bill into law.
Last week saw a low level of volatility in the Forex market, despite the announcement that a trade deal between the E.U. and the U.K. had been agreed, due to the truncated week and low level of market activity caused by the Christmas holiday. This low level of price movement is likely to persist over the week in Forex markets as several countries have public holidays this week, including London being closed this Monday and Friday.
Announcement of the trade agreement between the E.U. and the U.K. last Thursday boosted the British pound but by very little. The deal is almost certain to be ratified by the British Parliament this Wednesday and should then come into effect on Friday as 2021 begins.
Global stock markets are somewhat less bullish, with major indices pulling back a little over the week. However, stock markets generally have to be described as bullish over the medium and long terms.
This week is likely to see less activity in the Forex market due to the holiday season and a lack of high-impact releases scheduled as the Christmas and New Year holidays continue in much of the world.
Last week’s major story in the U.S. was the passage by Congress of a new $900 billion stimulus bill which would provide a one-off payment of $600 to all adult Americans. However, President Trump has refused to sign the bill, calling for the payment to be raised to $2,000 and for several ancillary provisions to be dropped. Regarding the coronavirus, the U.S. has finally begun to see a meaningful decline in confirmed new cases over the past week.
For the first time in several weeks, last week did not produce a rate of increase in the number of new cases globally, although it is too early to say that the current global wave may have peaked. The European Union and the U.S. are reporting similar levels of new cases and deaths, with the increase in cases seemingly beginning to level off in both regions.
The strongest growth in new confirmed cases is happening in Andorra, Bahrain, Bhutan, Bolivia, Burkina Faso, Colombia, Cuba, Czech Republic, Dominican Republic, Egypt, Estonia, Indonesia, Ireland, Israel, Japan, South Korea, Latvia, Lebanon, Liechtenstein, Lithuania, Malaysia, Mali, Nigeria, Norway, Panama, Russia, Senegal, Slovakia, Slovenia, South Africa, Thailand, Uruguay, U.K., and the U.A.E.
Technical Analysis
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index printed a bearish candlestick last week, despite the greenback’s rise against several major currencies. It closed quite near the low of its price range, which is a bearish sign. It seemed to invalidate a support level, although this level can be adjusted technically to look active now at 11,702. There is a strong bearish trend. Overall, next week’s price movement in the U.S. dollar looks somewhat likely to be downwards. This is a relatively good time to be trading the U.S. dollar short, so I am focusing only on trades which are short of the U.S. dollar.
GBP/USD
The GBP/USD currency pair again ended a week at a 2.5-year weekly high closing price, which is a bullish sign. The pound should be the most bullish major currency against the U.S. dollar now that a trade deal has been provisionally agreed between the U.K. and the E.U., although the price is some way off its high – nevertheless the close is within the top half of the weekly range.
BTC/USD
Bitcoin has again begun to make huge bullish leaps into blue sky as it trades at new all-time high prices well above the big, psychological, round number at $25,000. It has risen in value by more than 30% in the last two days alone. It is clearly rising due to a huge speculative bubble on very high volatility which is likely to burst, but there is a good chance the price will continue to advance for a few more days. Therefore, there are likely to be short-term trading opportunities here for a while, but they should be monitored carefully, and Bitcoin should be traded with very small position sizing.
Bottom Line
I see the best likely opportunities in the financial markets this week as long of the GBP/USD currency pair. I also see short-term trading opportunities long in Bitcoin (BTC/USD).