Author: fxanalyst

Euro Weekly Fundamental Forecast: Neutral

• Europe Braces for Cold Temperatures as Gas Prices Rise Once Again
• ECB all but set to announce a 50 bps hike, Fed’s base case follows suite
• Major Risk Events, ECB and Fed rate meeting plus US CPI and EU inflation

Recommended by Richard Snow

How to Trade EUR/USD

Europe Braces for Cold Temperatures as Gas Prices Rise Again

Markets continue to exhibit signs of being in transition as dominant trends for most of 2022 appear under threat. For most of this year, EUR/USD has trended lower but signs of easing inflation in the US has resulted in markets pricing in a softer dollar on the hopes that the Fed funds rate needn’t rise as high, or remain high for as long, as initially anticipated. A softer dollar and declining US treasury yields have been the driving force behind the EUR/USD ascendency, which is why this article considers developments in the US next week, mainly, the FOMC interest rate decision but also a crucial CPI print for November after the cooler October print.

Headwinds for the eurozone appeared to be dissipating as the price of EU gas declined during what has thus far been a mild fall (the 5th hottest on record) and the single market economy has thus far staved off a recession. One thing that lingers is stubbornly high inflation which has failed to move back into single digits and now reports of colder weather making its way across Europe has gas prices trickling higher, threatening to keep inflation elevated – adding to the euro’s challenges.

The ‘neutral’ tag accompanying this forecast is due to the uncertainty around not one but two related central bank meetings, comments via the press conferences that follow and the market’s overall perception of the respective decisions which can heavily influence the direction of travel for major FX pairs

Dutch TTF (EU Gas Prices) and EUR/USD

Source: TradingView, prepared by Richard Snow

Major Risk Events

Next week is by far the busiest week on the economic calendar ahead of the inevitable slowdown into Christmas and the new year.

Inflation

With the dollar driving most of EUR/USD price action, it makes sense to consider this highly important data print for the world’s largest economy, particularly after the first sizable drop in the general level of prices in October. Markets have already priced in (to a degree) the possibility of lower expected inflation and a second successive print lower should support the current dollar selloff and subsequently buoy EUR/USD. On Friday, the final EU inflation figures are due for release but since this is the third and final number, it is unlikely that there will be a material difference in the final figure, but something to keep an eye on nonetheless.

Central Bank Rate Meetings on Tap

The Fed kicks off the week of central bank meetings where Fed officials continue to make reference to the cumulative effect of prior rate hikes and the appropriateness of slowing future hikes, while at the same time stressing that more needs to be done. As such, the base case for next weeks meeting is a 50 bps hike but, more importantly, markets will be eagerly awaiting the Fed’s summary of economic projections to see where officials see inflation and the terminal rate for 2023. Quantitative tightening (QT) is set to continue at a pace of £95 billion per month into next year and ought to reach around $500 billion worth of tightening by the end of 2022. Thankfully for the Fed, US data continues to show signs of a robust economy despite the aggressive tightening as jobs numbers continue to accumulate each month and the latest services ISM report suggests that the US economy is growing at a faster pace than in October.

On Thursday, the ECB President Christine Lagarde will answer questions on the Bank’s interest rate decision which appears poised for a 50 bps hike although some governing council members were unable to rule out the possibility of a 75 bps hike, but that appears to be a lower probability outcome at this stage. The ECB is set to begin QT in 2023 as it has been passively reducing its balance sheet by purposely deciding not to reinvest a portion of maturing bonds under its Asset Purchase Plan (APP) – one of its quantitative easing (QE) measures.

Customize and filter live economic data via our DailyFX economic calendar

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

S&P 500, Volatility, FTSE 100 and Hang Seng Fundamental Forecast Talking Points:

• Global equities have generally held steadfast or advanced through the opening week of the year, which is impressive given the still-troubled backdrop
• A favorable Fed rate forecast shift from the NFPs this past week didn’t seem to spill over to the S&P 500, nor did the ISM service sector plunge – will bank earnings change the calculus?
• Even more remarkable than the US indices is UK’s FTSE 100 which is eyeing record highs despite clear recession warnings and Hong Kong’s Heng Sang charging higher

Recommended by John Kicklighter

Get Your Free Equities Forecast

Fundamental Forecast for the S&P 500: Bearish

Globally, equities seem to be in a generally optimistic position. There may be some measure of seasonal influence at play in this stance or a lot of speculative appetite; but in many instances, it is increasingly conflicting with the tangible fundamental outlook. The IMF kicked off 2023 with a warning that a third of the world’s economies are facing a recession this year; and for many of those not in a technical contraction, it will feel like one. It is likely that the markets have become conditioned over the past decade to dismiss natural economic and financial troubles owing the outsized influence of the world’s central banks. Through much of recent history, these major institutions have stepped in with stimulus even when there wasn’t a tangible economic concern but merely the sign of a market tantrum. Yet, with the extraordinary inflation levels of the past year and risk of embedded higher prices for the future (it doesn’t have to be at the extremes); there is little chance that the authorities are still the reliable backstop they once were.

When it comes to setting expectations straight on what central banks will and will not do, there has been no more transparent a group than the Federal Reserve. They have reiterated their stance that rates in 2023 will peak at consensus of 5.1 percent and no cuts will be realized before year’s end. The market has constantly discounted that view. After the December employment report this past week, the rate forecast for June (the loose terminal time frame) ebbed with a notable boost for the S&P 500. What is far more remarkable though is that the slump in the ISM service sector survey (49.6) – which is a strong proxy for the broader economy – furthered the Friday bounce on a small change in rate forecasts. That is remarkable considering it significantly raises the onus of a recession and everything that means for the markets. Ultimately, this index is still carving out an extraordinarily narrow range as a carry over of seasonal conditions and is in the middle of its range. The Dow is near multi-month highs and the Nasdaq 100 on the verge of fresh multi-year lows. The common factor is the extremely low level of expected volatility. Below, I overlaid (an inverted) VVIX Index. This is a volatility of volatility measure that is a better measure of complacency than the standard VIX. It has pushed to lows not seen since March 2017. That is extreme and carries a meaningful directional influence.

of clients are net long. of clients are net short.

Change in	Longs	Shorts	OI
Daily	-14%	15%	-3%
Weekly	-8%	7%	-1%

Chart of S&P 500 Overlaid with Inverted VVIX Index, 14-Day Historical Range (Daily)

Chart Created on Tradingview Platform

Fundamental Forecast for the FTSE 100: Bearish

If the S&P 500’s resilience is remarkable, the UK-based FTSE 100’s standings are extraordinary. The 3.3 percent charge through the opening week of the year is impressive in its own right, but there wasn’t much in the way of scheduled fundamentals that would get in the way of a seasonal charge. What is more remarkable is where it has ended the week. It was the highest close since July 2018. Technicians will definitely be arguing whether this was a break or test of the multi-month range of highs, but the fundamentally-minded have to point out the backdrop circumstances for the economy. The Bank of England has not been shy about its warnings that the United Kingdom was facing a recession this year. It has said this in the context of reflecting on exceptional high inflation and reiterating that interest rates will need to remain high in order to keep price pressures from becoming sticky. No central bank help and economic struggle does not exactly scream support for the FSTE 100’s eying record highs. Perhaps general risk trends or key data (Friday’s run includes the monthly GDP report) will shake the bulls from their trance.

of clients are net long. of clients are net short.

Change in	Longs	Shorts	OI
Daily	-11%	2%	1%
Weekly	-57%	57%	24%

Chart of FTSE 100 (Weekly)

Chart Created on Tradingview Platform

Recommended by John Kicklighter

Improve your trading with IG Client Sentiment Data

Fundamental Forecast for the Hang Seng: Bullish

Where I maintain considerable skepticism around the confidence in many regions’ indices, one of the areas that I hold out the possibility for further improvement despite the global position is in China and its administrative regions. China – the world’s second largest economy – has registered a significant slump in economic activity that has been exacerbated by the strict Covid protocols of the past year. With the shift in stance around ‘Zero Covid’, the reopening of the economy has led to a surge in cases of illnesses but it has also drawn scrutiny to the impact this wave has on growth potential from an avoidance of shopping and absence of workers for production – even if the government will allow for it. It is likely that the spread of the virus will have a negative impact on the economy, but it is likely to be less severe an impact than would be full lockdowns given its impact on domestic consumption and supply chain constraints in a region already flooded with stimulus via high-yield lending. While this is a fundamental consideration for mainland, it also has its impact on the administrative regions. In particular, the flow of financing through Hong Kong stands to benefit the investment into a reopened economy. The Hang Seng earned a 6.2 percent rally this past week (the 5th such week of that magnitude or greater since the October bottom) and cleared its 200-day simple moving average.

Chart of Hang Seng Index Overlaid with Shanghai Composite (Weekly)

Chart Created on Tradingview Platform

Discover what kind of forex trader you are

US Dollar Technical Forecast: Neutral

• The USD started a bullish move with a test above range resistance but was quickly slammed back-down on Friday after the release of a disappointing Services PMI report. This data point showed the lowest read since March of 2020 and was expected at 55 but instead came in at 49.6 (readings below 50 indicating contraction).
• Next Thursday brings the December CPI report to markets and inflation has been the big driver of late. Expectations are for continued softening with inflation forecast to come in at 6.5% for headline CPI and 5.7% for Core CPI.
• The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

Recommended by James Stanley

Get Your Free USD Forecast

After closing out a year of heavy trends, in both directions, the US Dollar limped into 2023 trade holding a two-week range. But perhaps more interesting than the mean reversion itself was the context, as the range had built after a back-breaking sell-off in Q4 that erased more than 50% of the move that started to build from the lows in January of 2021. What took 21 months to build was half-erased in three months. And that led to the back-and-forth price action in the USD as we opened 2023 trade.

With Fed policy firmly in a hawkish position and with the US economy still showing strength, the pathway appeared to lead to higher rates from the Fed as the bank continues to try to tackle inflation; and with economic vulnerability in Europe and the UK, this could further make the USD as an attractive venue on the back of that shifting theme.

We saw extension of that move in early-Friday trade, helped along by a mixed bag of an NFP report. The unemployment rate dropped back down to 3.5%, which is a bullish factor for the US labor market and in-turn, viewed as a hawkish factor for the Fed. But – on the inflation aspect of that report, Average Hourly Earnings disappointed, coming in at 4.6% versus a 5% expectation, so this offset that falling unemployment rate to a degree, at least from a fundamental perspective.

The market reaction was less mixed as USD strength and equity weakness showed in the immediate aftermath of Non-farm Payrolls.

But then another factor came into the equation. ISM Non-manufacturing PMI was released at 10 AM and came out with its lowest reading since March of 2020. This was expected to print at 55 but instead came in at 49.6. This data point coming in below 50 indicates contraction, which caught many by surprise. This shows that the Fed’s rate hikes are having an impact on the economy and with PMI considered a leading indicator, that impact is perhaps far greater than what many are expecting, the Fed included. The immediate reaction was a fast erasing of prior USD gains as the currency fell back into its prior range, with equities ramping-higher.

At this point, the US Dollar is crawling back towards long-term support, which I’ve plotted on the below chart as the range between 2017 and 2020 swing highs.

US Dollar Weekly Price Chart

Chart prepared by James Stanley; USD, DXY on Tradingview

USD Range Support

Given the massive reaction on Friday, the DXY daily bar is working on a bearish engulfing formation, as of this writing. That’s usually a strong signal of momentum and can often have carry-through as the engulfing formation itself is often tracked with the aim of a momentum change.

So, while the fundamental picture appears to be USD-positive, the technical picture isn’t quite so clear as a completion of the engulf formation puts the ball back in bears’ courts, with the following question thereafter whether sellers can drive below the 103.45 level that held the 2022 swing low on two separate occasions.

And if sellers can break that level, for how long can they run? The USD was already flashing oversold values from a number of vantage points, and there’s another support level a little lower, around the 103 level, which was the panic high from March of 2020.

US Dollar Daily Chart

Chart prepared by James Stanley; USD, DXY on Tradingview

USD Capitulation Low, EUR/USD Capitulation High?

For next week, the big question is how USD bulls respond to another support test in this zone that held the lows for three weeks. The price of 103.45 came into play after the CPI report and FOMC meeting in December, and it held the lows again in on the final trading day of the year, which makes this price the 2022 close.

But what happens if sellers can elicit a quick break of that price early next week? Will more sellers suddenly show up that were noticeably absent while the range was building after the Q4 sell-off?

I’m more interested in the prospect of finding a capitulation low in that scenario, particularly if it can happen around the Thursday CPI report. This would be like what showed in the S&P 500 in October, when the CPI report triggered a fresh bearish breakout that was quickly snapped back, with the index quickly moving back into a bullish trend reversal after that.

So, the USD is not yet bullish and the bearish engulf on the daily chart illustrates that. But there may be a bullish backdrop around the corner and for this scenario to play out, it’ll need some help from the Euro.

EUR/USD

EUR/USD started 2023 trade with a breakdown, and this was the first lower-low that had printed on the daily chart since the pair bottomed in September.

Support soon showed up at a trendline projection and this held the low on Tuesday. A Wednesday bounce was faded on Thursday and, again, support showed at this trendline projection, around the 1.0517 level.

On Friday, after the NFP report, sellers were starting to make some ground, but they couldn’t get very far below the 1.0500 psychological level and then that’s when the PMI report helped to bring a strong reversal of that theme. This has helped EUR/USD to push right back up to resistance at 1.0636, which was the 2020 swing low in the pair. The daily bar is currently showing a bullish engulfing formation which is generally tracked for continuation potential in that direction.

Recommended by James Stanley

How to Trade EUR/USD

EUR/USD Daily Price Chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Bigger Picture

Taking a step back, we can see an extended underside wick on the weekly chart, and this is generally not something that I would want to look to take on short exposure with. That wick illustrates a strong reversal and given that it was pushed by economic data, that may be a theme that has some continuation potential. And adding in another technical factor, the daily bar finishing as a bullish engulf further enforces that possibility.

But, like support on DXY above, resistance in EUR/USD is at a rather imposing place on the chart, and this raises the possibility of a bullish breakout to a fresh high that may open the door for reversal or fade setups in the pair. The next spot of resistance that I’m tracking in EUR/USD is a zone that runs from the 1.0750 psychological level up to the 1.0778 prior swing high.

EUR/USD Weekly Chart

Chart prepared by James Stanley; EURUSD on Tradingview

GBP/USD

The British Pound has struggled when compared to the Euro of late and this is illustrated in the juxtaposition of GBP/USD against EUR/USD. While EUR/USD is not very far off from a fresh high, GBP/USD remains ensconced in a slightly more bearish backdrop.

But, like EUR/USD, the pair is showing a bullish engulf formation, and this happened after a test of a key Fibonacci level. The price of 1.1843 is the 38.2% retracement of the 2021-2022 major move. That price helped to set the low before a strong bullish move drove prices right back to resistance at 1.2105. I had highlighted that level in yesterday’s USD Price Action piece as a decision point for bears, which has since held as support.

This may be a bit more attractive, at least at this stage, for USD-strength scenarios but, notably, bears should remain cautious if the bullish engulf confirms. The big question for next week is how much continuation may follow, and that puts focus back on resistance at the 1.2223 level.

Recommended by James Stanley

Get Your Free GBP Forecast

GBP/USD Daily Price Chart

Chart prepared by James Stanley; GBPUSD on Tradingview

USD/CAD: Shifting Tides

I talked about this on Thursday which extended a topic that I began to broach on Tuesday, which is the shifting dynamic in USD/CAD.

For the second half of Q4, the Canadian Dollar was one of the few global currencies that was weaker than the USD. This is well illustrated by the purple box on the below chart, when USD/CAD rallied from 1.3250 up to the 1.3700 handle.

But 1.3700 is where matters got messier; and bulls just could not break-through. CAD started showing a bit more strength and this week, even when USD was breaking out of the range ahead of the PMI report on Friday, USD/CAD was lagging, indicating that CAD-strength. And then when USD reversed, USD/CAD plunged, highlighting how that weak USD theme was well-matched with a strong Canadian Dollar.

This puts USD/CAD in an attractive spot for those looking at USD-weakness scenarios. Or, alternatively, a strong CAD can be voiced elsewhere, such as bearish EUR/CAD or GBP/CAD setups.

In USD/CAD, my next support is at the 1.3338 level, after which the 1.3250 psychological level comes back into the picture.

Recommended by James Stanley

Get Your Free Top Trading Opportunities Forecast

USD/CAD Daily Chart

Chart prepared by James Stanley; USDCAD on Tradingview

USD/JPY

USD/JPY put in a strong reversal last quarter, falling from above the 150 handle all the way down towards the 130 level. That psychological level began to come into play this week, helping to set a low as a falling wedge formation built. And when USD-strength was running high going into Friday morning, the pair had already broken out and pushed up to the ‘r3’ level that I had talked about on Tuesday. That price is simply a spot of support-turned-resistance at 134.45 and, as bulls soon found out, it was a rigid level of resistance.

Prices in USD/JPY have already snapped back and sellers didn’t stop at a support test of the prior ‘r2’ level. This puts focus back on the 131.25 spot which, for next week, becomes confluent with the topside of the falling wedge formation.

This keeps the door open for higher-low support, which would simply need to hold above the 130.00 level to keep the door open for bullish reversal scenarios.

Recommended by James Stanley

How to Trade USD/JPY

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley; USDJPY on Tradingview

— Written by James Stanley

Contact and follow James on Twitter: @JStanleyFX

Pound Sterling (GBP) Fundamental Forecast: Bearish

• After the Festive Season Companies are bracing for Lower Sales, Profits
• Challenging UK Business Environment Could see an 85% Reduction in Energy Relief
• Risk Events for the Week Ahead: UK GDP, US inflation and UoM sentiment

Recommended by Richard Snow

See what our analysts foresee in Q1 2023

Source: TradingView, prepared by Richard Snow

After the Festive Season Companies are bracing for Lower Sales, Profits

Next week we look forward to trading updates from retailers Sainsbury’s JD Sports, Tesco, Marks and Spencers and Asos with updates indicating that holiday shopping was not as bad as once feared particularly in the middle of railway and post office strikes.

With this being the first Christmas free from Covid restrictions, food and clothing retailers have performed well considering the cost-of-living squeeze and inflation well into double digits. Grocery sales according to till data from market researcher Kantar revealed that Tesco and Sainsbury’s rose 6% and 6.2% in the Christmas quarter. However, reported volumes were lower meaning investors will be looking to the trading updates for clarity on profitability.

Current guidance out of UK retailer Next, which is often viewed as a bellwether for the UK consumer economy anticipates lower sales and profits throughout 2023 when the Bank of England is expected to reach restrictive territory and hold policy rates until inflation comes down.

Challenging UK Business Environment Could see an 85% Reduction in Energy Relief

The British government will announce to parliament next week how it plans to cut unaffordable energy support for businesses by around 85% in the next financial year. Jeremy Hunt’s office communicated the need for long-term affordability and value for money for the taxpayer. This, at a time when gas prices have fallen drastically but remain higher than in early 2021.

Prime Minister Rishi Sunak has issued an invite to unhappy trade union leaders to ‘constructive’ talks as thousands of workers from rail to healthcare continue strike action over demands for better pay. Their demands come after the UK entered into double digit inflation and unlike the EU is yet to return from it.

Recommended by Richard Snow

Trading Forex News: The Strategy

Risk Events for the Week Ahead

UK specific events are rather light but we will get insight into the state of the UK economy with November GDP data. However, the US has arguable one of the most important data prints of 2023 in the first few days of trading with CPI on Thursday. We have already witnessed multiple lower inflation prints which contrasts the expanding labor market. Lower inflation suggests that interest rates need not go too much higher, while greater employment data suggests that there is more spending going on in the economy, capable of driving prices higher. Lastly, on Friday the preliminary Michigan consumer sentiment figures continue to trend in a positive direction as global oil and gas prices ease and the job market thrives.

Customize and filter live economic data via our DailyFX economic calendar

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX