The difference between success and failure in Forex trading is very likely to depend upon which currency pairs you choose to trade each week, and not on the exact trading methods you might use to determine trade entries and exits. Each week I am going to analyze fundamentals, sentiment and technical positions in order to determine which currency pairs are most likely to produce the easiest and most profitable trading opportunities over the next week. In some cases it will be trading the trend. In other cases it will be trading support and resistance levels during more ranging markets.
Big Picture 27th December 2015
Last week I highlighted long UISD/CAD as the probable best trade of the week. This did not work out so well as the USD fell more or less everywhere, and this pair was no exception, falling by 0.80%. Nevertheless, there is a strong, long-term uptrend here that is still valid and is statistically likely to continue.
This week I again see the best opportunity as long USD/CAD. It is in a very strong bullish trend although it did not make a new high last week and may have topped out at least temporarily at 1.4000. I also see short GBP/USD as having some good potential but the move down may be quite choppy and also may be limited at about 1.4500.
Keep in mind that this week sees the last few days before the New Year holiday starts, and that many market professionals particularly in Europe may be on holiday now until the New Year period really ends next Monday 4th January. There is very little key news due and as such it may be a quiet week, although we may instead see strong year end flows.
Fundamental Analysis & Market Sentiment
The strong currency is the USD. The fundamental data could be stronger, however there have been no bad surprises and we now seem to be set on a course of gradual rate rises. The position technically for the USD also looks quite strong. The currency is now trading higher than it was 6 months ago against every major global currency except the JPY.
Weaker currencies are a little less clear but there are two that stand out: the CAD and the GBP. European currencies in general are fairly weak.
Canadian fundamentals are poor and the price of oil, with which the currency is very highly positively correlated, has fallen to new multi-year lows. Although there has been something of a recovery in recent economic data releases, the economic picture going forward is far from rosy. The Bank of Canada recently stated that it would theoretically consider negative real interest rates should another financial crisis arise, which probably contributed to the latest round of weakening of the currency.
British fundamentals are also looking dubious as the Bank of England is seen as unlikely to raise rates any time soon.
Technical Analysis
USD/CAD
The price action looks very bullish, however last week this pair did not manage to reach new 11 year highs. In fact there is a possible double or triple top at the key round number of 1.4000, which I had noted as a possible resistance level last week as it is a key psychological number as well as a previous monthly high in May 2004. The price is now sitting on support and even if this is a broken there are several good levels not too far below. It is far too early to give up on this bullish trend.
GBP/USD
I warned last week that we were starting to approach some key supportive levels at around 1.4800 and 1.4700. We got very close to 1.4800 and we have had a move up from there with some momentum. However looking at the chart we can see a well-established if rather choppy downwards trend, with several key resistance levels not far above. If you also imagine a bottom line to the channel of the price action, we have probably bounced off that line however you draw it. Note how 1.4500 has tended to act as a floor for this pair over many years.
The safest trade of the week is probably long USD/CAD.