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 20th October 2019
In my previous piece last week, I forecasted that the best trade would be long of GBP/USD. This was a great call as this currency pair was the standout performer of the week, rising in value by 2.61%.
Last week’s Forex market saw the strongest rise in the relative value of the British Pound, and the strongest fall in the relative value of the U.S. Dollar.
Fundamental Analysis & Market Sentiment
Fundamental analysts are very split over whether the recent quarter-point cut in the U.S. interest rate will be the last cut for a while, or whether the Federal Reserve will follow up with a further quarter-point cut over the near term.
The U.S. economy is still growing, but there are increasing fears of a pending recession, with the FOMC opining that the probability of a recession has grown. Last week’s retail sales data was poor, and sentiment is souring on the greenback.
The British Pound and Euro received a strong boost last week as it seemed as if a Brexit deal would finally be agreed between the U.K. and the E.U. and the prospect of this boosted both currencies, particularly the British Pound. However, the weekend saw the British Parliament vote to effectively attempt to kick the can further down the road by way of more constitutional chicanery. It is now unclear whether the deal may somehow still be agreed before 31st October, currently the legal date on which Brexit will happen, or whether a further delay to the process will be agreed. In any case, we can expect the British Pound to open the week significantly lower.
Stock markets have continued to advance slightly, especially the U.S. market. The benchmark S&P 500 Index is not very far now from its recent all-time high price. Sentiment is broadly risk-on, but that remains very fragile, and the price action on the S&P 500 Index is suggestive of a topping-out at about 3000.
U.S. Dollar Index
The weekly price chart below shows a significant technical development: a strongly bearish candlestick breaking below the former support level at 12355, closing right on its low with above-average volume, making the first close below its price from 3 months ago in some time. These are bearish signs, suggesting that the U.S. Dollar will fall further over the short term.
The past week printed a very large, strongly bullish candlestick which closed right on its high. This was almost as strong an advance in this currency pair as last week. The price is above its level from 13 weeks ago, but not quite 26 weeks ago. These are bullish signs, but the key driver in this advance has been the progress that was seen last week towards the conclusion of a Brexit deal between the U.K. and the E.U. and the end of the long-running, seemingly endless Brexit saga with Brexit finally happening on 31st October, just a few days away. However, an obstacle was raised with the British Parliament narrowly voting to disrupt the process over the weekend, which again calls Brexit into question. This means the Pound is likely to open significantly lower this week, with an initial gap down. It now seems that the British Parliament will hold a vote on approving the deal on Tuesday, and there is a chance they may pass the deal. If so, the Pound will be likely to rise further, but we could see a lot of volatility if Parliament rejects a deal and there is brinkmanship over the granting of a further Brexit delay by the European Union. If the British government somehow manages to finagle Brexit on 31st October as scheduled, without a deal, the Pound will be likely to drop sharply by as much as 20%. Everything will depend upon politics but there will be opportunities for traders in the British Pound over the coming week – that much is almost certain.
This week I forecast the best trade will be long of GBP/USD the minute the British Parliament approves a Brexit deal, but only under that scenario, and initial profit will probably be best secured within only a few hours of that event, if it occurs.