Forex Market Review: What Happened Last Week
Last week, the U.S. dollar index (DXY) marked its eighth consecutive week of gains, its longest stretch since July 2014, propelled by a robust ISM services report for August which underscored the resilience of the U.S. economy even in the face of rising interest rates.
Conversely, while other major global currencies weakened, the euro was particularly affected, with EUR/USD falling to a 2-month low below 1.07, as the economic momentum in the eurozone continued to wane. German factory orders and industrial production witnessed a steeper decline than anticipated, positioning Germany on the cusp of a recession, while the third estimate of the eurozone's Q2 GDP was downwardly adjusted to 0.1% from 0.3%.
Of all the G10 currencies last week, the British pound fared the worst, with GBP/USD falling to end-May lows, weighed down by the Halifax House Price Index which dropped by 4.6% year-on-year in August 2023, marking the most significant decrease in UK house prices since August 2009.
Oil-related currencies, such as the Norwegian krone (NOK) and the Canadian dollar (CAD), performed relatively better, buoyed by a marked surge in oil prices.
The upcoming week promises a flurry of pivotal economic events that could impact FX pairs. The spotlight will be on the U.S. CPI report on Wednesday, where headline inflation is projected to rise from 3.2% to 3.6% in August, and the ECB policy meeting on Thursday, which teeters between an interest rate hike and a pause. Alongside these, Germany's ZEW economic sentiment is set for release on Tuesday, followed by the UK jobs report on Tuesday and GDP on Wednesday, US retail sales on Thursday, and the Michigan Consumer Sentiment on Friday. Additionally, the U.S., Japan, and Switzerland are poised to disclose their producer price inflation figures.
Key Economic Events To Monitor This Week
United States:
- CPI inflation rate (Wed.): 3.2% y/y prior, 3.6% y/y expected.
- CPI core inflation (Wed.): 4.7% y/y prior, 4.3% y/y expected.
- PPI (Thu.): 0.8% m/m prior, 1.2% m/m expected.
- Retail sales (Thu.): 0.7% m/m prior; 0.2% m/m expected.
- Michigan Consumer Sentiment (Fri.): 69.5 prior, 69.2 expected
Euro Area:
- ECB interest rate decision (Thu.): (deposit rate) 3.75% prior, 3.75% expected
- Germany ZEW economic sentiment index (Tue.): -12.3 prior, -15 expected
- Euro area industrial production (Thu.): 0.5% prior; -0.7% expected
Other Data To Follow:
- UK unemployment rate (Tue.): 2% prior, 4.3% expected.
- UK average salary growth (Tue.): 2% y/y prior, 8.2% y/y expected
- UK GDP (Wed.): 5% prior, -0.2% expected
- Switzerland’s producer prices (Thu.): -0.1% prior
Chart Of The Week: German Factory Orders Dive To Multi-Decade Lows, Only Pandemic Slump Was Deeper
New Trades for The Week
Short GBP/JPY
- Entry: 182.96
- Take profit: 175.9
- Stop Loss: 185.6
- Risk/Reward Ratio: 2.7
GBP/JPY Fundamental Analysis: Looking ahead, the pound's relative weakness could continue to persist over the next week. This is based on the UK's anticipated disclosures of an increasing unemployment rate and a negative GDP reading for July. Additionally, the 2-year yield difference between UK and Japanese bonds seems to have reached its peak at this point. As the market adjusts its expectations toward fewer BoE rate hikes, leading to steady or declining UK short-term yields, coupled with ascending Japanese yields, it may present a strong headwind for bullish hopes on GBP/JPY.
GBP/JPY Technical Analysis: The GBP/JPY pair is currently testing the support of its March 2023 trendline, which aligns with the lows observed in July at 176.33. Our modified-MACD indicator has also signaled a short position. Delving into Fibonacci retracement levels, we are looking at potential levels of 180 (23.6%) initially, followed by 175.9 (38.2%). The latter figure, 175.9, could be the bearish target for the mid-term. It would be prudent to place a stop loss just above the September peak close, pegged at 185.6.
Short EUR/JPY
- Entry: 156.78
- Take Profit: 151.88
- Stop Loss: 158.5
- Risk/Reward Ratio: 2.9
EUR/JPY Fundamental Analysis: The core issues influencing the yen are similarly relevant when considering its cross with the euro (EUR/JPY). A significant event to watch for is the ECB policy meeting on Thursday, highlighting a tug-of-war between the hawks and doves. Yet, even if the hawks prevail with a rate hike, it doesn't guarantee significant bullish momentum for the euro.
This is because the ECB will likely recognize the evident deceleration in economic activity, amplifying the looming threats of a recession.
as the ECB will have to acknowledge the marked slowdown in economic activity with a consequent increase in imminent recessionary risks. Upcoming data on Germany's ZEW and eurozone's industrial production, preceding the ECB meeting, could further substantiate this perspective. Already, the short-term rate differentials between Germany and Japan are on a decline, exerting bearish strain on EUR/JPY.
EUR/JPY Technical Analysis: The revised MACD indicates a cross-under, signaling a sell stance, and its line is moving downward past the zero mark, reinforcing the signal's strength.
Examining the Fibonacci retracement between the highs of August and the lows of March 2023 points to potential levels of 154.88 (23.6%) initially, followed by 151.88 (38.2%). This latter figure is in close proximity to the July low of 151.47. This zone offers an appealing point for profit-taking on a bearish move. It would be wise to position a stop loss just beyond the September peak, at 158.5.
Long USD/PLN:
- Entry: 4.3058
- Take Profit: 4.6311
- Stop Loss: 4.1745
- Risk/Reward Ratio: 2.7
USD/PLN Fundamental Analysis: Last week, the National Bank of Poland slashed its interest rates by a substantial 75 basis points to 6%, sharply diverging from the market's prediction of a modest 25 bps cut. With Poland's annual CPI inflation clocking in at 10.1% year-on-year in August 2023, there's a pronounced anticipation of significantly negative real interest rates for the Polish zloty (PLN). As we approach the mid-October elections, the PLN is forecasted to face further devaluation, given the mounting political critiques concerning its robustness. Currently, the short-term yield differential between US Treasuries and Polish bonds is on an ascent. If the U.S. CPI report outpaces expectations, it could exert an additional upward force on USD/PLN.
USD/PLN Technical Analysis: USD/PLN has surpassed the pivotal resistance level represented by the 200-day moving average, signaling a potential end to the significant downtrend initiated in October 2022. This transition is further emphasized by the MACD indicator's marked upward trajectory, signifying the onset of a promising bullish phase. Delving into the Fibonacci extension analysis, which spans from the 2023 lows to the 2022 peaks, we have potential targets at 4.37 (38.2%) initially, followed by 4.50 (50%) and then 4.6370 (61.8%). The 4.6370 level stands out as an enticing proposition for bullish investors, especially with the forthcoming array of risk-averse events such as the Fed's policy meeting and the impending Polish elections. A prudent stop loss can be set at 4.17, mirroring the USD/PLN level just before the unexpected rate cut announcement by the Bank of Poland.
Open trading ideas:
- Short GBP/CHF
- Opened on September 4th at 1.1156
- Take Profit: 1.09
- Stop Loss: 1.1250
- Profit & Loss: -0.1%
- Short EUR/AUD
- Opened on September 4th at 1.6708
- Take Profit: 1.6200
- Stop Loss: 1.6900
- Profit & Loss: +0.22%
- Long USD/CHF
- Opened on August 28th at 0.8840
- Take Profit: 0.9250
- Stop Loss: 0.8680
- Profit & Loss: +0.90%
- Short GBP/CAD
- Opened on August 28th at 1.7115
- Take Profit: 1.6707
- Stop Loss: 1.7296
- Profit & Loss: +0.7%
- Long USD/CAD
- Opened on August 21st at 1.35
- Take Profit: 1.3860
- Stop Loss: 1.3350
- Profit & Loss: +0.80%
- Long CHF/NOK:
- Opened on August 21st at 12.06
- Take Profit: 12.47
- Stop Loss: 11.89
- Profit & Loss: -1%
- Short GBP/USD:
- Opened on August 14th at 1.2690
- Take Profit: 1.2310
- Stop Loss: 1.2850
- Profit & Loss: +1.36%
- Short NZD/JPY:
- Opened on August 14th at 86.70
- Take Profit: 83.50
- Stop Loss: 88.00
- Profit & Loss: +0.00%
- Short EUR/CAD:
- Opened on August 14 at 1.4730
- Take Profit: 1.4280
- Stop Loss: 1.49
- Profit & Loss: +1.00%
- Long U.S. Dollar Index (DXY):
- Opened on August 7th at 102.19
- Take Profit: 105.5
- Stop Loss: 100.90
- Profit & Loss: +2.4%
- Long USD/SEK:
- Opened on August 7th at 10.60
- Take Profit: 11.20
- Stop Loss: 10.46
- Profit & Loss: +4.3%
- Short NZD/CAD:
- Opened on July 24th at 0.8174
- Take Profit: 0.7975
- Stop Loss: 0.8263
- Profit & Loss: +1.5%
- Long CHF/JPY*
- Opened on June 19th at 158.58
- Take Profit: 171.62
- Stop Loss: 152.5
- Profit & Loss: +3.5%
Long CHF/JPY is expected to be closed at a 3.5% gain, given the shifting yen’s outlook
