Start the week of December 27, 2021 with our Forex forecast focusing on major currency pairs here.
Technical Analysis
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index printed a bearish engulfing candlestick last week, after again rejecting the resistance level identified at 12257 over the previous week. Note how this key resistance level has held again – in fact it held just after the FOMC release the week before last when it was tested, which is possibly a bearish sign. While this continued failure at resistance is not enough to invalidate the long-term trend (the price is well above its levels from 3 and 6 months ago), it is very notable that there is clearly strong resistance here, which is having impact. This suggests that despite the long-term bullish trend, we may now be experiencing a bearish pullback or even a reversal. I would not look towards the USD as a key driver for any trades over the coming week. For a while, and possible for the entire coming week, there will likely be momentum against the US Dollar, although the Japanese Yen is considerably weaker.
USD/JPY
The USD/JPY currency pair made its highest weekly close in 5 years, printing a healthy sized bullish candlestick which closed very near the top of its range. These are clearly bullish signs that we are likely to see a further rise over the coming days and weeks. However, it should be noted that there were recently several higher daily closes all the way up to the very key resistance level at 115.25. Although the rise in USD/JPY is supported by the improved risk sentiment we are seeing in markets since data began to show omicron as relatively mild, this currency pair is still prone to a sudden selloff below 115.25, so I do not want to go long here until we see a daily (New York) close above 115.25.
S&P 500 Index
The S&P 500 stock market index made its highest ever weekly close, printing a healthy sized bullish candlestick which closed very near the top of its range. These are clearly bullish signs that we are likely to see a further rise over the coming days and weeks. The S&P 500 Index is a buy.
AUD/USD
We had expected the level at 0.7038 might function as support, as it had acted previously as both support and resistance. Note how these “flipping” levels can work well. The H1 chart below shows how the price rejected this support level with an hourly pin bar right at the start of last Monday’s London session session, typically a great time to enter new trades in major currency pairs, marked by the up arrow in the price chart below as it rose from the support level. This trade was very profitable, achieving a maximum positive reward to risk ratio so far of more than 7 to 1 based upon the size of the entry candlestick.
USD/CAD
We had expected the level at 1.2959 might function as resistance, as it had acted previously as both support and resistance. Note how these “flipping” levels can work well. The H1 chart below shows how the price rejected this level with a large, bearish inside candlestick during last Monday’s London/New York session overlap, often a good time to enter a new trade in a major Forex currency pair involving the US Dollar, marked by the down arrow in the price chart below. This trade has been nicely profitable so far, achieving a maximum positive reward to risk ratio of more than 5 to 1 so far based upon the size of the entry candlestick structure.
GBP/USD
The British pound definitely made a statement last week, breaking above the top of an inverted hammer. By doing so, it does suggest that we are ready to continue going higher, which I would suspect means that we are heading towards the 1.35 handle. Pullbacks at this point in time should be thought of as potential buying opportunities, but you should also keep in mind that we are trading between Christmas and New Year’s, so liquidity is a major issue, and you have to be cautious with your position size. Nonetheless, the British pound certainly looks as if it has become very bullish in very short order.
EUR/USD
The euro rallied a bit last week, but as you can see, we are still very much in the same range we have been in for a while. If you are looking for a place to watch your money just grind back and forth, this might be the best pair for you. I see nothing on this chart that would make me place a trade, but I do recognize that if we can break out above 1.14, that would be a very strong buy signal, just as a move down below the 1.12 level would be a strong sell signal. The fact that this week is so thin means I do not expect either one of those actually happen.
EUR/JPY
The euro rallied significantly against the Japanese yen last week to threaten the ¥129.50 level. This is an area that I think is going to continue to be important, and I suspect it is probably only a matter of time before we get above there. This is probably more to do with the Japanese yen than it is to do with the euro, based upon what I am seen across the board when it comes to JPY-related pairs.
Bottom Line
I see the best opportunity in the financial markets this week as likely to be long of the S&P 500 Index, the USD/JPY currency pair following a daily (New York) close above 115.25, and the agricultural commodity Corn in USD terms.
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