The difference between success and failure in Forex / CFD trading is very likely to depend mostly upon which assets you choose to trade each week and in which direction, and not on the exact methods you might use to determine trade entries and exits.
So, when starting the 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, technical factors, and market sentiment. Read on to get my weekly analysis below.
Fundamental Analysis & Market Sentiment
I wrote in my previous piece two weeks ago that the best trade for the week was likely to be:
- Short of BTC/USD following a daily (New York) close below $28,000. This was a good call as Friday’s close was below that level – Bitcoin trades over the weekend – at $27,488 and at the time of writing, BTC/USD is down by 18.84% from that price. This is a big profit.
After more than four months, the war in Ukraine is beginning to fade away from its former place as a lead news item. Russian forces are currently conducting a strong offensive in eastern Ukraine and seem to be having some successes, although Ukrainian forces are also counter attacking. The war initially caused quite strong movements in some markets, especially in certain agricultural commodities such as Wheat and Corn, but now seems to be having little effect beyond helping to keep the agricultural commodities sector buoyant. The rise in commodity prices can be partly attributed to rising global inflation.
Markets have moved more firmly into risk-off mode, with a global environment of higher-than-expected inflation data and central bank rate hikes.
Bearish sentiment on risky assets got a tailwind from surprisingly poor data Friday on US CPI (inflation), which showed an unexpected increase in the annualized rate from 8.5% to 8.6%, which is another new 40-year record high. This has now triggered an expectation that the Federal Reserve may hike its interest rate this week by 0.75% rather than the 0.50% which had formerly been expected. This sent US treasury and corporate bond yields higher and US stock markets lower, as yields on stocks are becoming less competitive. Reinforcing the global theme of rising rates, the Reserve Bank of Australia hiked its interest rate last week, and the European Central Bank was forced to make a stronger conditional commitment to a rate hike at its next meeting in July.
Last week’s important economic data releases came in as follows:
US CPI (inflation) data came in at 8.6%, exceeding the consensus expectation which was an expectation of a fall from the previous month’s 8.5%. The month-on-month increase was considerably higher than had been expected.
The European Central Bank left its Main Refinancing Rate unchanged as expected but was forced to make stronger commitments to rate hikes soon.
The Reserve Bank of Australia hiked rates by 0.50% to 0.85% when a hike of only 0.25% had been expected.
Canadian employment data came in stronger than had been expected.
Cryptocurrencies seem to finally be making extraordinarily strong breakdowns, with minor coins generally in serious trouble as they decline in value by the day, and Bitcoin trading well below its recent support in the $28,000 area. Short trades in cryptocurrencies will continue to attract speculators in this environment, while margin calls will force retail liquidations. There will likely be more casualties in the cryptocurrency ecosystem.
The Forex market is dominated by renewed strength in the US Dollar while the Japanese Yen, whose weakness is still tacitly encouraged by the Bank of Japan, continues to weaken.
There is increasing hope that the coronavirus pandemic may be almost over, with rates of coronavirus infection globally falling again last week in line with a long-term downwards trend. The only significant growths in new confirmed coronavirus cases overall right now are happening in Belize, Brazil, Chile, Guatemala, and the UAE.
The Week Ahead: 13th June – 18th June 2022
The coming week in the markets is likely to more volatile than last week. There are several releases of high importance scheduled which have the potential to significantly move markets. They are, in order of likely importance:
US FOMC Federal Funds Rate, Statement, and Projections – markets are expecting a 0.50% rate hike, but there is a significant chance the Fed may hike by 0.75%.
US Retail Sales – this is expected to increase, a decrease may suggest a recession is more likely.
Bank of England Official Bank Rate and Monetary Policy Summary – a rate hike of 0.25% is expected.
SNB Policy Rate and Monetary Policy Assessment – it is expected rates will remain unchanged, leaving the Swiss Franc with an unusually low, negative interest rate of 0.75%.
US PPI – this is expected to increase by 0.8% month-on-month, a higher increase will suggest inflation is likely to increase further.
Australian Employment data
Technical Analysis
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index rose strongly last week, in line the long-term bullish trend, printing a bullish candlestick that closed extremely near the top of its range. This is significant as it looked like that Dollar may have peaked near a multi-year inflection point, as can be seen in the price chart below.
A notable feature in the Forex market this week was that the rise in the greenback has been against almost all other currencies, showing the market is currently being driven by US Dollar strength.
Much will likely now depend on what the Federal Reserve does and says this Wednesday. Until then it will likely be unwise to bet against the USD.
BTC/USD
Bitcoin fell again last week in line with its long-term bearish trend. The week ended with a close at a new 17-month low and the printing of a large bearish candlestick. The price chart below ends at Friday’s close but over the weekend, at the time of writing, the price has fallen to as low as the $22k area.
These are very bearish signs, and there has been panic in the crypto sector due to the collapse of certain stablecoins such as Luna/Terra. This helps the bearish case.
It looks like Bitcoin is likely to keep falling, as it is showing strong downwards momentum and trading in relative “blue sky.” The price could easily reach the $13k area very soon, making a short here an interesting trade.
.jpg "BTC/USD Weekly Chart")
USD/JPY
The USD/JPY currency pair powered dramatically higher to reach a new 20-year high in a movement which has dominated the Forex market. Volatility and momentum are unusually strong, which supports the case for a further rise in the price.
We have a “perfect storm” here dominating the Forex market, with the US Dollar clearly the strongest major currency with long-term strength behind it as the Federal Reserve flirts with an exceptionally large rate hike of 0.75% next week. Meanwhile, the Japanese Yen is the weakest major currency and is being talked down by its central bank, the Bank of Japan, which desperately needs to reflate the Japanese economy, whose inflation remains below the target of 2%.
It is of course unclear how much further the move might run, but clear opportunities like this are rare in Forex, so trading this currency pair long is worthy of very serious consideration. USD/JPY remains a buy.
US 2YR Treasury Yield
2-year US treasury yields have been rising since October 2021 in a strong and dramatic long-term trend. It is not well known that major rates such as this one, have been one of the most profitable instruments for trend traders over recent decades.
This trend saw a strong resumption on Friday when US CPI (inflation) data came in with an unexpectedly high increase to a new 40-year high, as it increases the prospect of a Federal Reserve rate hike next Wednesday as high as 0.75%.
2-year rate yields are rising in several countries, not just in the US, increasing the bullish case here.
Many brokers do not offer rate yields, but it can be traded with slightly less effectiveness as short 2-year US treasuries, or as a futures contract.
Bottom Line
I see the best opportunities in the financial markets this week as likely to be:
- Long of USD/JPY.
- Long of the 2YR US Treasury Yield.
- Short of BTC/USD.