This week I will begin with my monthly and weekly Forex forecast of the currency pairs worth watching. The first part of my forecast is based upon my research of the past 20 years of Forex prices, which show that the following methodologies have all produced profitable results:
- Trading the two currencies that are trending the most strongly over the past 6 months.
- Trading against very strong weekly counter-trend movements by currency pairs made during the previous week.
- Carry Trade: Buying currencies with high interest rates and selling currencies with low interest rates.
Let us look at the relevant data of currency price changes and interest rates to date, which we compiled using a trade-weighted index of the major global currencies:
Monthly Forecast February 2023
For the month of January, I forecasted that the EUR/USD currency pair would rise in value and that the USD/JPY currency pair would fall in value.
The forecast performance was as follows:
For the month of February, I forecast that the EUR/USD currency pair will rise in value.
Weekly Forecast 5th February 2023
Last week, I made no weekly forecast. This week, I forecast that the GBP/CAD currency cross will rise in value, as it made an unusually strong counter-trend price movement last week.
Directional volatility in the Forex market is likely to remain the same or decrease over the coming week.
Last week was dominated by relative strength in the US Dollar, and relative weakness in the British Pound.
Key Support/Resistance Levels for Popular Pairs
I teach that trades should be entered and exited at or very close to key support and resistance levels. There are certain key support and resistance levels that can be monitored on the more popular currency pairs this week.
Let us see how trading two of these key pairs last week off key support and resistance levels could have worked out:
USD/CHF
I had expected the level at $0.9288 might act as resistance in the USD/CHF currency pair last week, as it had acted previously as both support and resistance. Note how these “role reversal” levels can work well. The H1 price chart below shows how the price rejected this level shortly after the start of last Tuesday’s London session with double inside candlesticks, marked by the down arrow in the price chart below signaling the timing of this bearish rejection. This trade has been profitable, achieving a maximum positive reward to risk ratio of more than 8 to 1 so far based upon the size of the entry candlestick structure.
EUR/JPY
I had expected the level at ¥139.96 might act as support in the EUR/JPY currency cross, as it had acted previously as both support and resistance. Note how these “role reversal” levels can work well. The H1 price chart below shows how the price rejected this level during Friday’s Asian session with an inside bar, marked by the up arrow in the price chart below signaling the timing of this bullish rejection. This trade has been very profitable, achieving a maximum positive reward to risk ratio of more than 10 to 1 so far based upon the size of the entry candlestick structure.
GBPUSD
The GBP/USD delivered a swift move lower on Friday as financial institutions were forced to consider stronger-than-expected U.S jobs numbers.
After touching the 1.24000 vicinities in the middle of last week the GBP/USD managed to essentially destroy a lot of short-term bullish optimism with one sword thrust on Friday. The U.S Federal Reserve increased their key lending rate by 0.25% on Wednesday and delivered rather aggressive monetary policy rhetoric, saying the U.S central bank would likely have another hike in March which would make the Federal Funds Rate 5.00%.
However, many financial institutions viewed the U.S. Fed’s comments rather suspiciously, and likely continued to bet against the USD believing the Fed would be proven wrong regarding its outlook. The USD remained rather weak on Wednesday and Thursday following the Federal Reserve’s pronouncements. The Bank of England added to the stature of the GBP/USD on Thursday, when the British central bank raised the Official Bank Rate to 4.00% with an increase of 0.50% as predicted. However, by mid-Thursday, there were signs of nervous selling building in the GBP/USD as it began to touch key technical support.
Then on Friday, U.S Non-Farm Employment Change numbers delivered a rather strong dose of short-term horror to Forex for speculators. Jobs numbers from the U.S came in much stronger than expected. The increase in hiring results caught many financial houses shorting the USD and expecting a rather weaker number on the wrong side of behavioral sentiment, this as the USD became violently bullish. The GBP/USD sank from nearly 1.22650 to 1.21000 almost in a blink of an eye.
The GBP/USD Downturn after the Strong U.S Jobs Numbers continued to gather Force
Not only did the 1.21000 get hit, but it proved vulnerable and by the end of Friday the GBP/USD went into the weekend near 1.20500. Tomorrow’s opening in the GBP/USD will be important and will demonstrate whether or not financial houses have regained their breath and will stop selling the GBP/USD, or if trading houses will continue to show nervousness and take the currency pair lower.
- The U.S. Federal Reserve may have given a large clue on Wednesday that many trading institutions did not take seriously, when the U.S central bank expressed concern about economic momentum in the U.S not showing enough deflationary pressure.
- While many job layoffs in the U.S have been making noise via the media, the stronger than expected hiring shows in the short-term, that higher interest rates are not hurting the U.S economy terribly.
The Short-Term and Mid-Term are Two Different Things for the GBP/USD
Day traders caught on the wrong side of Friday’s sudden downturn in the GBP/USD may be frustrated. The swift move lower was fast and if proper risk management was not being used, trading accounts of speculators were likely hurt badly. Risk taking tactics in the coming days need to be conservative too.
The question for bullish traders of GBP/USD is if the move lower which actually started mid-day on Thursday and then built up strong selling power on Friday will continue, or if financial houses will start to buy the GBP/USD and create a more tranquil trading ground. Short-term and mid-term outlook can hold different viewpoints regarding the value of the GBP/USD now, compared to three months down the road.
GBP/USD Weekly Outlook:
Speculative price range for GBP/USD is 1.18950 to 1.222910
If a day trader believes the GBP/USD has further room to traverse lower they may not want to be overly ambitious. Last week’s dive to lower prices surprised many traders, but the 1.20300 to 1.20000 levels should be watched closely on Monday. If the GBP/USD were to fall below the 1.20000 this might set off alarm bells, but it might also ignite the interest of speculative bulls who may believe the selloff has been overdone.
Behavioral sentiment proved late last week that it can shift quickly and produce a rapid change of direction. If the 1.19750 ratio begins to seriously be tested some traders may think lower short-term depths can be achieved, but how much lower can the GBP/USD traverse before buyers step in?
The selloff in the GBP/USD was stark and painful for bullish traders. Risk management is urged for speculators who believe the GBP/USD have been oversold. Conservative traders may want to monitor trading early this week to see if the GBP/USD can stabilize and start to incrementally increase its value. If the GBP/USD can hold the 1.21500 level early this week and establish some upwards momentum, traders may be tempted to aim for the 1.22000 realm and above.
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