Forex Forecast: Pairs in Focus

Adam Lemon

Get the Forex Forecast using fundamentals, sentiment, and technical positions analyses for major pairs for the week of January 4, 2021 here.

The difference between success and failure in Forex trading is very likely to depend mostly upon which currency pairs you choose to trade each week and in which direction, and not on the exact trading methods you might use to determine trade entries and exits.

When starting the trading 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 and market sentiment.

It is a good time to be trading markets right now, as there are many valid strong trends in favor of stocks and riskier assets and against the U.S. dollar.

Big Picture 3rd January 2021

In my previous piece last week, I saw the most attractive trade opportunities as long of the GBP/USD currency pair and I also saw short-term opportunities in Bitcoin in U.S. dollar terms (BTC/USD). This was a great call as the GBP/USD currency pair closed up over the week by 0.92% while Bitcoin has risen by slightly more than 29%, so this call produced an averaged win of 15%.

Last week’s Forex market saw the strongest rise in the relative value of the Australian dollar and the strongest fall in the relative value of the U.S. dollar. There is still a valid, long-term, strong trend against the U.S. dollar, meaning it is an attractive time to be trading Forex, as the greenback is the prime driver of the Forex market.

Fundamental Analysis & Market Sentiment

The headline takeaway is that we are seeing a continuing long-term positive trend in stock markets and in riskier currencies such as the British pound, the euro, and the Australian dollar, plus a strongly negative trend in the U.S. dollar over the long term. Bullish sentiment has been improved by the passage of a new coronavirus stimulus bill in the U.S. although U.S. citizens will only be receiving payments of $600 and not the $2,000 requested by President Trump.

Last week saw a low level of volatility in the Forex market due to the truncated week and minimal market activity caused by the Christmas holiday. There is likely to be more price movement as markets come back online tomorrow, with the exception of New Zealand which will enjoy one further day of public holiday.

The 6th of January will see a final attempt to halt the process of Joe Biden becoming President in the U.S. Senate, but analysts forecast that the movement to delay acceptance of the results by 10 days while an investigation is conducted into alleged voter fraud as having no real chance of success.

Ratification of the trade agreement between the E.U. and the U.K. last Wednesday boosted the British pound with the GBP/USD currency pair, closing at a 2.5-year high closing price.

Global stock markets are very bullish, with several major indices closing at all-time weekly high closing prices, notably the S&P 500, the NASDAQ 100, the Down Jones 30, and the Nikkei 225.

Last week again saw a new record high in the number of daily confirmed coronavirus cases and deaths. The European Union has seen the number of new cases fall and plateau, but new cases in the U.S. are still increasing.

The strongest growth in new confirmed cases is happening in Andorra, Argentina, Bahrain, Bolivia, Canada, Colombia, Cuba, Cyprus, Egypt, Honduras, Ireland, Israel, Japan, Kazakhstan, South Korea, Malaysia, Mali, Malta, Norway, Panama, San Marino, Thailand, Tunisia, the U.K., and the U.S.A.

Several countries have begun vaccination programs. Israel has vaccinated over 12% of its population (including 45% of over-60s) with the Pfizer vaccine. Bahrain is next with over 3% of its population vaccinated.

Technical Analysis

U.S. Dollar Index

The weekly price chart below shows that the U.S. Dollar index printed a bearish candlestick last week, making its lowest weekly close in more than 2.5 years. It closed within the bottom half of its price range, and the action seems to have invalidated the key support level at 11,702, which may now begin to act as new resistance. There is a strong bearish trend. Overall, next week’s price movement in the U.S. dollar looks likely to be downwards. This is a relatively good time to be trading the U.S. dollar short, so I am focusing only on trades which are short of the U.S. dollar.

USDX weekly chart

S&P 500 Index

The S&P 500 stock market index ended the week at an all-time high weekly closing price, which is a very bullish sign, as was its close very near the top of its weekly price range. Volatility was not especially high - in fact, it was a little on the low side - meaning, that although odds are with the bulls, the price may be due a bearish retracement. Rising stocks are supported by positive risk sentiment as we start the new year of 2021. We are likely to see higher prices here over the coming week and the NASDAQ 100 Index is in a similarly strong position as the market rally has tended to be led by technology stocks.

S&P 500 weekly chart

BTC/USD

Bitcoin has again made a huge bullish leap into blue sky as it trades at new all-time high prices well above the big, psychological, round number at $30,000. It has risen in value by almost 30% in the last week alone. It is clearly rising due to a huge speculative bubble on very high volatility which is likely to burst, but there is a good chance the price will continue to advance for a few more days especially as it has continued to rise into 2021. Therefore, there are likely to be short-term long trading opportunities here for a while long, but they should be monitored carefully, and Bitcoin should be traded with very small position sizing.

BTC/USD weekly chart

AUD/USD

The AUD/USD currency pair again ended a week at a 2.5-year weekly high closing price, which is a bullish sign. The weekly candlestick closed within the top half of its price range which is another minor bullish sign. The Australian dollar has consistently been one of the strongest major currencies over recent weeks and is a key barometer of risk sentiment. As stock markets and risk sentiment continue to improve, we can expect to see the price of this currency pair continue to rise.

AUD/USD weekly chart

GBP/USD

The GBP/USD currency pair again ended a week at a 2.5-year weekly high closing price, which is a bullish sign. The pound was boosted last week by the final ratification and implementation of a trade deal between the U.K. and the E.U. and the price ended the week near its high, which is a bullish sign. The price action signals quite strongly that we are likely to see higher prices over the coming days in cable. However, bulls might watch out for the big psychological quarter-number at 1.3750 which might act as strong resistance, plus the fact that the U.K. seems to have got into severe difficulties with its coronavirus vaccination program which is proceeding more slowly than had been expected. This, coupled with the strong rise in new cases and incidences of the new more infectious strain, may see the U.K. economy underperform against expectations, which could impact the British pound.

GBP/USD weekly chart

Bottom Line

I see the best likely opportunities in the financial markets this week as long of the S&P 500 Index and the GBP/USD and AUD/USD currency pairs. I also see short-term trading opportunities long in Bitcoin (BTC/USD).

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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