Fundamental Analysis & Market Sentiment
I previously wrote on Sunday, Dec. 29, 2024 that the best trade opportunities for the week were likely to be:
The weekly loss of 0.79% equals 0.26% per asset. Meanwhile, last week saw a more active market as the Christmas holiday came to an end. The very few key takeaways were as follows:
Last week saw continued risk-off sentiment, with particular fears of President-Elect Trump’s recent tariff threats and 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 on Monday.The British pound and euro have been notably weak in the Forex market, while the US dollar and the Japanese yen have been strong.There was little high-impact data last week. However, there will be some this coming week, so markets will probably be much more active now that the seasonal holiday is over.
The Week Ahead: Jan. 6-10, 2025
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 as follows:
It should be noted that Monday is a public holiday in Italy.Monthly Forecast for 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 as follows:
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 for Sunday, Jan. 5, 2025
Last week, I made no weekly forecast as there were no unusually strong price movements in currency crosses that I could see, which is the basis of my trading strategy.The Japanese yen was the strongest major currency last week, while the euro was the weakest. Volatility was much higher over this period, as 30% of the most important Forex currency pairs and crosses changed in value by more than 1%. Volatility likely to increase again this week.
Key Support/Resistance Levels for Popular Pairs
Technical Analysis – US Dollar Index
Last week, the US Dollar Index once again printed a bullish candlestick that continued toward the long-term bullish trend, as it bullishly broke out to make its highest close in more than two 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 seems to suggest 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, a sharp selloff in stocks, an an uptick in US treasury yields. 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. However, for almost three weeks after plunging to a new long-term low price well below the $1.0400 mark, the price consolidated without turning definitively bearish.This has changed over the past three weeks, and the past trading period finally saw a further significant breakdown. The euro suddenly weakened, although it is not obvious why. The price traded below the $1.0225 level 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” territory.
USD/JPY
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 factor. 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 pair 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 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 two-year high. A look at the weekly chart below shows that the bullish momentum has been strong here since October, and the trend has been stronger and clearer than any other trend in the Forex market. This 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 Canadian dollar.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 Canadian dollar and the New Zealand dollar 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 two-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 itself was slow.This currency pair does not trend very reliably, so I also don’t take long-term trades in it, but it similarly looks very weak right now. For a few weeks, I have been talking about weakness in all the commodity currencies, notably the Canadian dollar and the New Zealand dollar.
Bottom Line
I see the best trading opportunities this week as the following:
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