The difference between success and failure in Forex / CFD trading is very likely to depend mostly upon which assets you choose to trade each week and in which direction, and not on the exact methods you might use to determine trade entries and exits.
So, when starting the week, it is a good idea to look at the big picture of what is developing in the market as a whole, and how such developments and affected by macro fundamentals, technical factors, and market sentiment. Read on to get my weekly analysis below.
There are a few strong trends in the markets, and following them might help put the odds in your favor, so it is an interesting time to be trading.
Fundamental Analysis & Market Sentiment
I wrote in my previous piece last week that the best trade for the week was likely to be long of USD/JPY or short of EUR/USD, but only following respective daily (New York) closes above ¥130.80 and below $1.0498. I was also prepared to go long on the 2-Year US Treasury Yield. This was a good call as my price levels on the Forex currency pairs kept you out of trouble, while the 2-Year US Treasury Yield rose by 0.37% over the week.
The news remains dominated by the Russian invasion of Ukraine, which is well into its third month, but seems to have become stalemated by an effective, NATO-armed Ukrainian defense. Russian forces have withdrawn from the northern part of the company, switching focus to an offensive aimed at fully capturing the eastern and southern coastal regions of Ukraine. The war initially caused quite strong movements in some markets, especially in some agricultural commodities such as wheat and corn, but now seems to be having a primary effect of depressing some European currencies and global stock markets, possibly because the Russian government continues to make oblique nuclear threats. Of course, there are other fundamental factors weighing on stock markets, such as the specter of a return to stagflation, and rising interest rates.
We are currently seeing weakness in stock markets almost everywhere, as well as weakness in European currencies and risk assets in general, with the British Pound and the Swiss Franc again reaching long-term lows against the greenback. The New Zealand Dollar is also making long-term lows. The biggest global stock market index, the S&P 500, is looking especially bearish, as it closed the week lower with the 1-year low not far away.
This bearishness is being driven by several fundamental and sentimental factors:
- Rising US treasury yields are relatively high, with both the 2-year and 10-year yields ending the week at new 3-year highs.
- Inflation continues to a major concern, as G20 economies continue to mostly report new CPI data exceeding consensus forecasts, suggesting that inflation is still accelerating.
- The US Federal Reserve continues to tighten monetary policy, hiking rates by 0.50% last week in its biggest rate hike in 22 years and determining to begin shrinking its $9 trillion asset portfolio in June. Seven more rate hikes are expected this year, with the Fed’s rate expected to be very close to 3% as we enter 2023. The Fed is not seen as having much room to maneuver, with inflation rates hike and rising in almost every G-20 nation. Headline annualized inflation in the US is currently running at 8.5%. There is an increasing feeling that the Fed has been a little late with the rate hikes.
- The Bank of England hiked its base rate by 0.25%, with a minority voting for a hike of 0.50%. Most disturbingly, the Bank announced that it expects British inflation to reach an annualized rate above the psychological level of 10%.
- The Reserve Bank of Australia hiked its interest rate by 0.25% to 0.35%, after Australian inflation data released during the previous week exceeded expectations.
- US Non-Farm Payrolls data slightly exceeded expectations, but the US unemployment rate unexpectedly rose from 3.5% to 3.6%, so the data was mixed and did not have a major impact upon markets.
The Forex market again saw an advancing US Dollar over the past week, with the greenback gaining as a safe haven and on rising yields. However, its bullish momentum has slowed, and we saw bigger movements in other currencies over the past week, notably the British Pound which had a huge downwards move at the end of the week as analysts digested that 10%+ inflation forecast from the Bank of England.
Commodity markets have lost much of their recent buoyancy, and are mostly declining, excepting of energies. Natural gas and gasoline are reaching new long-term highs.
Rates / bonds are one of the most strongly trending and overlooked markets. We see rates continuing to rise almost everywhere. In the US market, the 10-year rate is now advancing considerably more firmly than the 2-year rate.
There is increasing hope that as rates of coronavirus infection globally fall for the seventh consecutive week, the pandemic may effectively be almost over. The only significant growths in new confirmed coronavirus cases overall right now are happening in Dominica, South Africa, Taiwan, and the Solomon Islands.
The Week Ahead: 9th – 13th May 2022
The coming week in the markets is likely to be less volatile as there are few releases of high importance scheduled. They are, in order of likely importance:
US CPI (inflation) data – this will be very closely watched and is an extremely important piece of data for global markets. Analysts are expecting only a small month-on-month increase of 0.2%, and the result may begin to indicate a further slowing of inflationary momentum in the US.
US PPI data – this indicates price changes in raw materials but is unlikely to be seen as of much importance as it comes after the CPI data.
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index rose again last week, in line with the long-term bullish trend, printing a bullish candlestick that closed well within the top quarter of its range. This was again the highest weekly close seen since March 2020. Dollar bulls will be encouraged that the bullish momentum continues, and the price has continued to advance to new highs. However, the pace of the increase has slowed down, which hints that the bullish momentum may be ready to slow down.
It will probably be wise to take trades in favor of the US Dollar in the Forex market over the coming week.
S&P 500 Index
The world’s most important stock market index, the S&P 500, fell again last week, closing well inside correction territory, and again making its lowest weekly closing price seen in the past year. Bearish momentum has slowed however, with the price seemingly reluctant to break down below the 4,000 area. On the daily chart, the price is trading well below its 200-day and 50-day simple moving averages. These are bearish signs. Trading major stock market indices short is a difficult challenge, but experienced traders might want to be looking for short trades here. This is not a good time to be buying stocks.
I see the US stock market as affected by rising global inflation rates and a tightening monetary policy from the Federal Reserve.
The USD/JPY has risen like crazy over the past nine weeks, gaining each week. The past week saw the price rise again, but unable to make a new high. We are seeing bullish momentum continue to decrease, with no daily closes made above the key level at ¥130.80. The price is also reluctant to remain above the pivotal point at ¥130.50 for very long.
As momentum has declined, and as the price has already exceeded ¥130.00, I only want to enter a new long trade in this currency pair if we see a daily (New York) close above ¥130.80.
The British Pound fell sharply last week to reach a new 18-month low against the US Dollar. European currencies excepting the Euro are generally weak, but the Pound is showing standout weakness after the Bank of England forecast British inflation would exceed 10% by the end of 2022.
The fall in GBP/USD on Thursday was unusually strong and produced a small but significant follow-through in bearish momentum over the next day.
With a still-strong US Dollar, and Pound weakness driven by fundamental forecasts, the price here looks likely to fall further over the coming days. However, bears need to beware the support level at $1.2314.
I will be prepared to enter a new short trade if we get a daily (New York) close below $1.2314.
10-Year US Treasury Yield
There has been much focus on US treasury yields lately, after the yield curve briefly inverted a few weeks ago, and as the Fed and other major central banks begin to take significant steps to tighten monetary policy, such as last week’s 0.50% rate hike. The Fed now appears to be moving more rapidly to keep up with the curve, and that suggests a bullish outlook for the Dollar yield.
The US Dollar is the strongest major currency right now, and this is partly because the yields on its treasury bills have continued to reach new long-term highs not seen in 3 years.
Although the 2-year yield increased again last week, the 10-year yield performed better than the 2-year, which is perhaps a good reason to be somewhat cautious about entering a new long trade in the 2-year, unless a new high is made. Trading the 10-year long might be a better approach.
The price ended the week at a new long-term high and is not far from the 10-year high.
Natural Gas has been on a wild ride this year, and it has certainly been in the bullish direction. Natural Gas futures have more than doubled during this calendar year of 2022.
The price chart below shows that last week printed a bullish candlestick which broke to new long-term highs, but the candlestick has a very large upper wick due to Friday’s strong fall from the high, meaning bulls need to be very cautious about trading this commodity, or at trade very small with a wide stop loss due to the high level of volatility.
I will be prepared to enter a new long trade if we get a daily (New York) close above 700.
I see the best opportunities in the financial markets this week as likely to be:
- Long of USD/JPY following a daily (New York) close above ¥130.80.
- Short of GBP/USD following a daily (New York) close below $1.2314.
- Long of Natural Gas futures following a daily (New York) close above 700.
- Long of the US 10-Year Treasury Yield.