Fundamental Analysis & Market Sentiment
I wrote in my previous piece on 28th May that the best trade opportunities for the week were likely to be:
- Long of the NASDAQ 100 Index. The Index ended the week 1.62% higher.
- Long of the USD/JPY currency pair. This currency pair ended the week lower by 0.49%.
- Short of the NZD/USD currency pair following a daily close below $0.6000. This did not set up.
My forecast produced an overall win of 1.13%, averaging a gain of 0.38%.
Markets remain dominated by two ongoing debates in the USA – whether the Federal Reserve has really completed its cycle of rate hikes, and yesterday’s final resolution of the debt ceiling crisis as the Senate passed the deal. As opinion on these issues swing back and forth, the Dollar and stock markets swing up and down, with analysts scrutinizing every piece of US data for clues as to what the Fed will likely do at its next policy meeting in June.
The past week has seen the debt ceiling crisis completely resolved, which will probably produce a risk-on surge in the financial markets when they open for the week tomorrow. The NASDAQ 100 Index closed last week at a new 1-year high, while the boarder S&P 500 Index closed at a 9=month high.
The main issue now is the question of whether the Fed will hike rates by another 25bps at its next meeting in June. It looks increasingly likely that they will not, following last week’s stronger-than-expected US economic data, notably Friday’s NFP data which showed the US economy created more jobs than were expected last month, at 339k when only 193k were expected, following a strong print from JOLTS Job Openings data earlier in the week. On the other hand, the unemployment rate rose to 3.7% from 3.4% when a rate of 3.5% was expected.
The chance of a rate hike by the Fed in June is now priced at about 20%, down from 70% last week, but even if there is no hike then, it is widely expected that there will be one in July, so we likely have not reached the terminal rate yet.
Another key issue in the Forex market last week was the release of German Preliminary CPI data, which showed a month-on-month decline in inflation of 0.1% when a rise of 0.2% had been expected. This weakened the Euro somewhat as it lowered the prospect of ECB rate hikes. There was also a release of Australian inflation data, which showed that inflation there is running hotter than expected, but the underlying rate was expected.
Markets will now be focused on the US debt ceiling impasse and US non-farm payrolls data due at the end of the week.
Last week’s other key data releases were:
- US CB Consumer Confidence – this came in a little higher than expected, suggesting there is still a healthy level of spending.
- Canadian GDP – this was a little better than expected, with growth flat when a small decline was expected.
- US ISM Manufacturing PMI – this was almost exactly as expected.
The Week Ahead: 5th – 9th June
The coming week in the markets is likely to see a lower level of volatility thank last week, as there are fewer scheduled high-impact releases this week than there were last week. This week’s key data releases are, in order of importance:
- Bank of Canada Overnight Rate and Rate Statement – no hike expected.
- RBA Cash Rate and Rate Statement – no hike expected.
- Australian GDP – expected to slow.
- Swiss CPI (inflation) is expected to rise to 0.3% month-on-month.
- US ISM Services PMI
- US Unemployment Claims
- Canadian Unemployment Rate
Monday will be a public holiday in New Zealand.
EUR/USD: Weekly Forecast 4th June – 10th June
The EUR/USD made a new monthly low in the middle of last week, but then turned upwards as the currency pair reacted to dovish comments from U.S Fed officials.
The EUR/USD remains within the lowest realms of its one-month price range. Having touched a low of nearly 1.06375 last Wednesday, the EUR/USD challenged values seen in the third week of March. Yes, the EUR/USD did climb higher later on Wednesday as it correlated to the broad Forex markets, but it also went into the weekend within sight of its mid-term depths.
On Friday the EUR/USD was trading near a high around the 1.07800 level but was pushed backward like the broad Forex market. Economic data from Germany remains troubling as recessionary pressures seemingly mount within the nation. However, the reason the EUR/USD produced choppy conditions last week was caused by two Federal Reserve FOMC members saying they believed the U.S. central bank should not raise the Federal Funds Rate in June. The remarks from the two Fed officials came on Wednesday, but on Friday U.S jobs numbers came in better than expected and this made the USD stronger again as economic data poured cold water on speculative EUR/USD bulls.
EUR/USD Remains near Speculative Lows and Bearish Signals are Troubling
Traders who believe the EUR/USD remains oversold likely have many financial institutions that agree with them. However, day traders who are attempting to pursue upwards perceptions of the EUR/USD are likely to find it difficult to catch onto a trend and hold onto it without suffering from the reversals which have dominated the currency pair’s trading recently. The move lower in the EUR/USD has been strong since the 3rd of May, one month ago, when the Forex pair was trading near 1.10900.
A Week with Plenty of Rhetoric and Short on Economic Data Coming for EUR/USD
- While Services PMI reports will come from Europe tomorrow, major economic data in the coming days will be rather limited.
- This will likely leave the EUR/USD to be shaken by technical perceptions and behavioral sentiment.
- The stronger-than-expected Non-Farm Employment Change numbers from the U.S. this past Friday sets the table for more nervous broad market conditions because the outlook regarding the Federal Reserve remains unclear.
- The EUR/USD went into the weekend at its lows for the day, and essentially where the week of trading for the currency pair began last Monday.
EUR/USD Weekly Outlook:
The speculative price range for EUR/USD is 1.05900 to 1.08100
The EUR/USD finished last week essentially where it began which is not a bullish indication. The choppy conditions within the currency pair reflect the poor economic data from Europe and the aggressive stance the U.S. Federal Reserve still is exhibiting. Even though two U.S FOMC members spoke about the need to halt interest rates last week, not all U.S Fed members agree with this outlook.
Jobs data from the U.S. this past Friday was a reminder economic data from the U.S. remains rather strong regarding hiring and inflation. The EUR/USD trading below the 1.07100 level to end the week could be interpreted as a bearish signal technically when a one-month chart is looked upon.
Bullish speculators who believe the EUR/USD is oversold may be proven correct, but it may not be this week that the currency pair resumes a sustained move upwards. One of the key elements of trading is to know there can be a big difference between short and long-term outlooks in Forex. The EUR/USD certainly enjoyed buying momentum into early May, but behavioral sentiment has grown nervous regarding the U.S. Federal Reserve and continues to create headwinds.
Traders looking for upside momentum should probably look for quick-hitting trades in the coming days and expect more volatility to take place. If the EUR/USD balls below the 1.07000 level and challenges the 1.06700 to 1.06400 levels this would be a rather bearish sign and suggests some financial institutions could be positioning for another interest rate hike from the U.S Federal Reserve on the 14th of June.
NASDAQ 100 Index
We saw another rise in the NASDAQ 100 Index over the past week, for the sixth consecutive week. The picture here is very bullish, for several reasons:
- The weekly candle closed firmly higher, at its highest closing price seen in over one year, for the third consecutive week.
- The weekly candlestick closed right on its high price, showing practically no upper wick.
- Stock markets are generally bullish, and the S&P 500 Index is also technically bullish, but less so, ending last week at a new 9-month high price.
There are no key resistance levels until the 15000 area, so the price has lots of room to rise.
The NASDAQ 100 Index still looks like a buy, but if it quickly retreats below 13730, bulls should be concerned.
GBP/USD
The GBP/USD currency pair printed a weak engulfing candlestick. The British Pound is showing some relative strength as the Euro, with which is it usually strongly positively correlated, weakens.
Despite the US Dollar’s questionable direction, the Pound is in a long-term bullish trend, although there is little momentum within this trend. However, if you are going to trade against the US Dollar, this is likely to be a good currency to use. As expectations lower of a June rate hike by the Fed, it is quite possible we will see the US Dollar move lower over the coming week, although price action does look indecisive or maybe even a bit bullish there.
This pair is usually good to trade on breakouts, so I would look to go long following a daily candlestick that closes above the big round number at $1.2500 near the high of its price range.
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