Weekly #forex Forecast: US Dollar Index,#EURUSD,#AUDUSD,#USDJPY,#GBPUSD & Forex Fundamental Analysis & Market Sentiment (18-22 JULY 2022)
Start the week of July 18, 2022 with our Forex forecast focusing on major currency pairs here.
Fundamental Analysis & Market Sentiment
I wrote in my previous piece last week that the best trades for the week were likely to be:
- Short of EUR/USD following a daily (New York) close below $1.0100. This set up at the end of Monday, but the price ended the week higher by 0.45%.
- Long of USD/JPY following a daily (New York) close above €136.66 (ideally €137.00). This set up at the end of Monday, but the price ended the week higher by 0.80%.
My forecast produced a profit of 0.35%.
The news is currently dominated by the lowering inflation expectations which have emerged since Wednesday’s surprisingly high 9.1% US CPI print. The high inflation initially led to a stronger belief that the Fed would hike rates by 0.75% or even a full 1% at its next meeting, but the slightly stronger than expected US retail sales data released Friday plus lowering inflation expectations, lowering import price inflation, and another fall in manufacturing data, all suggests a 0.75% rate hike is most likely. This saw stocks rise at the end of the week and the US Dollar give up some of the gains it made earlier in the week.
After more than four months, the war in Ukraine has partly faded away from its former place as a lead news item and appears to be having little effect on markets except a possible weighing on global recession fears. Although there was much talk about a rise in the prices of agricultural commodities such as Wheat and Corn, recent weeks have seen strong falls in the prices of commodities.
The outlook regarding risk appetite is unclear. The US stock market is still in a bear market, but rose again last week, although the US yield curve remains inverted. The US Dollar Index rose again over the week, closing at yet another new 20-year high.
The past week has seen overall directional movement fall in the Forex market, despite the US Dollar advancing.
There were a few important economic data releases last week, which is why market volatility remained strong. The results came in as follows:
- US CPI – an annualized rate of 9.1% with a broad increase across sectors initially alarmed the market, which had only been expecting a new inflation rate of 8.8%.
- Chinese GDP data – rising by only 0.4% compared to the 1.2% which had been expected.
- US Retail Sales data – came in stronger than expected, showing a month on month rise of 1.0%, compared to the 0.7% which had been expected.
- RBNZ Official Cash Rate & Rate Statement – the RBNZ hiked rates by 0.50% to 2.50%, which had been widely expected.
- Bank of England testimony before UK parliament
- Bank of Canada’s Overnight Rate, Rate Statement, and Monetary Policy Report – the BoC raised rates by a full 1.00% to 2.50%, when a hike of only 0.75% had been expected.
- US PPI data – came in higher than expected, showing a month-on-month increase of 1.0%.
- Australian Employment data
- US Preliminary UoM Consumer Sentiment data
The Forex market saw yet another strong advance by the US Dollar last week. The advance was broad: the USD closed at long-term high weekly closing prices against every single major currency in the Forex market except the Swiss Franc. The Euro was especially weak, and the EUR/USD currency pair reached a new 19-year low below parity more than once, although notably, EUR/USD refuses to spend much time below $1.0000.
The historically low values we are seeing in the Euro and the Japanese Yen are likely to put their central banks, both of which are reporting this week, under pressure.
Rates of coronavirus infection globally dropped last week for the first time since May, suggesting that we may not be seeing the start of a significant new variant wave after all. The most significant growths in new confirmed coronavirus cases overall right now are happening in Belgium, Bulgaria, Montenegro, North Macedonia, Peru, Romania, Serbia, Albania, Barbados, Bolivia, Cyprus, Guatemala, Italy, Japan, Lebanon, Mexico, New Zealand, Paraguay, Switzerland, and Tunisia.
The Week Ahead: 18th July – 22nd July 2022
The coming week in the markets is likely to show a similar level of volatility to last week, as there are several high-impact data releases scheduled. They are, in order of likely importance:
- European Central Bank Main Refinancing Rate & Monetary Policy Statement
- Bank of Japan Outlook Report
- British CPI data
- Canadian CPI data
- New Zealand CPI data
- US Flash Services PMI data
- German Flash Manufacturing & Services PMI data
- Australian Monetary Policy Meeting Minutes
It is a public holiday in Japan on Monday 18th July.
EUR/USD
The euro has been all over the place during the week, as we have slammed into the parity level. However, we have held quite stubbornly in that area, so I think it’s likely that we could see a little bit of a short-term rally. Whether or not you choose to buy the euro is on you, but I will be waiting for signs of exhaustion after a rally to start getting short again. Prime candidates would be at the 1.02 level, and then the 1.04 level.
As long as the Federal Reserve continues to keep monetary policy tight, I don’t really care what the CB does. After all, they are going to raise interest rates soon, but they are so far behind the curve that the euro will continue to suffer.
GBP/USD
The British pound also plummeted a bit during the course of the week, testing the 1.18 level. I think at this point we also have a little bit of a recovery in the British pound, perhaps attempting to get back to the 1.20 level, which is an area that is a large, round, psychologically significant figure. After that, then we have the 1.22 level coming into the picture. Much like the euro, I will be looking to fade rallies at the first signs of exhaustion. More likely than not, I will be sitting on my hands at the beginning of the week.
USD/JPY
The US dollar continues to get overbought, and at this point in time, I think buying the USD/JPY pair is quite dangerous. Yes, we could continue to go higher, and you could even make the case for that being true several months ago. However, we are so overdone at this point in time that the risk to reward simply does not work out. On pullbacks, I could be a buyer, but I doubt it’s going to be anytime this week. Quite frankly, I would need to see more in the way of a pullback to offer value.
AUD/USD
The Australian dollar has also fallen during the course of the week but has also found quite a bit of support near the 0.67 region. At this point in time, I think the market will continue to try to recover, but the 0.70 level should be a massive resistance barrier that will be difficult to overcome anytime soon.
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index printed a large bullish candlestick which closed at a new 20-year high, in line with the long-term trend, which is bullish. This is significant as breaks to new high closes suggest the price will rise further over the coming days. However, note there is a very large upper wick, and that the price did not advance on Friday, so we may have seen a climax suggesting the price will not rise further soon.
Nevertheless, it looks wise to trade the US Dollar long over the coming week once it starts rising again on shorter time frames. This is a very powerful, long-term trend in the most important currency in the Forex market.
US Dollar Index Weekly Chart
Bottom Line
I see the best opportunities in the financial markets this week as likely to be:
- Short of EUR/USD following a daily (New York) close below parity ($1.0000).
- Long of USD/JPY following a daily (New York) close above €138.92 (ideally €139.00).
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