Forex Forecast: Pairs in Focus

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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 1st September 2019

In my previous piece last week, I forecast the best trades would be long of XAG/USD (Silver) following a daily close above $17.50, long of XAU/USD (Gold), and short of USD/JPY following a daily close below 105.00. The Silver trade worked out very well, as after closing at $17.64 on Monday, it ended the week up by a further 3.90%. Gold fell by 0.47%. The short USD/JPY trade was never triggered, as there was no daily close last week below 105.00. Overall, last week’s trades worked out well and were profitable, giving an averaged win of 1.14%.

Last week’s Forex market saw the strongest rise in the relative value of the U.S. Dollar, and the strongest fall in the relative value of the New Zealand Dollar.

Last week’s market was dominated by Dollar strength as hopeful signs emerged of a ratcheting down of trade tensions between the U.S. and China and U.S. advance GDP came in at the expected 2%, but that has been dashed by news released today that the U.S. administration will impose yet more tariffs on Chinese imports. This can be expected to weaken the U.S. Dollar and commodity currencies, while boosting safe havens such as precious metals and the Japanese Yen. This also is likely to cause the U.S. stock market to sell off when markets reopen on Tuesday after tomorrow’s holiday in the U.S. and Canada.

The Forex market was relatively quiet last week, but there are a few good trends which are persisting, notably long Silver and U.S. Dollar, paired with short Euro and New Zealand Dollar. However, I think the U.S. Dollar is likely to open with a gap down and remain weak over the next few days.

This week has a similar amount of high impact news releases due compared to last week, but the U.S. / China trade dispute is likely to remain as the main driver of markets.

Fundamental Analysis & Market Sentiment

Fundamental analysis now sees the Federal Reserve as likely to cut rates by an additional two quarter-points over the next few months, although many economists believe only one cut is needed, or even no cuts at all.

The U.S. economy is still growing quite strongly, but the new tariffs on Chinese goods keep causing stocks and the U.S. Dollar to sell off.

The British Pound has been boosted slightly by a greater expectation that some type of deal will be agreed between the E.U. and the U.K. over Brexit, but that optimism will begin to fade as the E.U. are publicly still refusing to amend the deal sufficiently to satisfy the British government.

The risk-off sentiment in the market is likely to return as markets open this week, with money flowing into safe-havens such as precious metals and the Japanese Yen, and out of the commodity currencies, especially the New Zealand Dollar.

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Technical Analysis

U.S. Dollar Index

The weekly price chart below shows that last week the USD Index rose, printing a normal-sized bullish outside candlestick which closed in the top third of its range. It was the highest weekly close in the index for nearly 2.5 years, and the weekly move bounced off the support level below at 12364. These are all bullish signs. The price is up over both 3 months and over 6 months, indicating a bullish trend. It is not clear that the nearby support has been broken. Overall, everything is signally a continuing Dollar advance, yet the greenback is likely to open weaker as the U.S. imposes new tariffs on Chinese imports.

usdx

XAG/USD

Silver in U.S. Dollar terms made its highest weekly close in almost 2.5 years, printing a very large bullish candlestick which closed within the top half of its range, above the former resistance level at $18.03. These are all bullish signs, although there was selling close to the nearest resistance level at $18.67. Despite this pause, it is likely that we will see renewed flow into safe havens this week, and Silver has benefitted from this, with precious metals generally looking like advancing further. However, bulls would be wise to be at lease a little cautious of $18.67.

xagusd

EUR/JPY

This currency pair printed a bearish pin candlestick last week, which closed very near its low, at the lowest weekly closing price for almost 2.5 years. These are all bearish signs. The Euro is very weak, and I anticipate safe-haven flow into the Japanese Yen. These conditions may boost the Euro a little, but that is likely to be overshadowed by flow into the Yen, so I see a further fall in this currency cross as likely to happen over the coming week.

eurjpy

NZD/JPY

This currency pair printed a doji candlestick last week, which was not particularly bearish. However, the weekly closing price was at a 7-year low, which is a bearish sign, and we are seeing a strong long-term bearish trend here. I expect “risk off” market conditions to dominate the coming week, which should see a rise in the Yen and a fall in the NZD as a generally very weak commodity currency, so short of this cross looks likely to be the best Forex trade of the coming week.

nzdjpy

Conclusion

This week I forecast the best trades will be long of XAG/USD following a daily close above $18.35, and short of EUR/JPY and NZD/JPY.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.