The markets were shaken after Fitch downgraded the US credit rating from AAA to AA+, citing concerns about the expected fiscal deterioration, the high debt burden, and political polarization.
Market Review: What Happened Last Week
In the US, the July labor market report showed mixed data. Non-farm payrolls increased by 187,000, missing expectations of 200,000, and the unemployment rate declined to 3.5%, surpassing the estimated 3.6%. Wages grew more than expected, rising by 4.4% year-on-year compared to the projected 4.2%. US companies delivered robust Q2 results, with 79% of S&P 500 companies reporting a positive EPS surprise and 65% reporting a positive revenue surprise. Meanwhile, American companies continue to report strong Q2 results, with 79% of S&P 500 companies reporting a positive EPS surprise and 65% reporting a positive revenue surprise.
Central banks made headlines with the Bank of England raising interest rates by 25 basis points to 5.25% as expected, and the Reserve Bank of Australia keeping rates steady at 4.1%, defying rate hike expectations.
In the Eurozone, retail sales unexpectedly fell by 0.3% in June 2023, missing market expectations of a 0.2% increase, and industrial production in Germany fell more than expected by 1.5% month-over-month in June 2023.
The U.S. Dollar Index (DXY) closed its third consecutive week in the green, while the euro (EUR/USD) and the pound sterling (GBP/USD) ended their third consecutive week in the red. The worst performers among major currencies were the Australian dollar (AUD/USD), down by 1.2% on a dovish RBA stance, and the New Zealand dollar (NZD/USD), down by 1% due to risk-off sentiment.
Looking ahead, the key data to monitor is the inflation report for the United States, scheduled for Thursday. U.S. producer prices and the Michigan Consumer Sentiment Index will also be in the spotlight. For GBP and EUR, investors should keep an eye on the UK GDP and Germany's final CPI print, respectively.
Forex Market: Key Events Of The Week
United States:
- CPI inflation report (Thursday): Economists predict an increase in the annual inflation rate to 3.3% from 3% (0.2% monthly). Core inflation is expected to slow to 4.7% from 4.8%.
- Producer inflation (Friday): Economists predict an increase in the annual inflation rate to 3.3% from 3% (0.2% monthly). Core inflation is expected to slow to 4.7% from 4.8%.
- Michigan Consumer Sentiment (Friday): The preliminary estimate of U.S. consumer morale is expected to show a slight easing to 71 in August from 71.6 in July.
Euro Area:
- Germany’s inflation rate (final) (Tuesday): The preliminary estimate of Germany's CPI for July revealed a 6.2% annual rise, down from 6.4% in June.
United Kingdom:
- UK’s GDP Growth Rate Q2 (Friday): Economists predict that the UK economy grew at a 0.2% quarter-on-quarter annualized rate in Q2.
Chart Of The Week: U.S. Treasury Yields On The Rise
New Trades for The Week
Long DXY Index
- Entry: 102.19
- Take Profit: 105.4
- Stop Loss: 100.90
- Risk/Reward Ratio: 2.5
Fundamental View
The recent increase in risk aversion across global markets is bolstering the US dollar's appeal as investors seek safe-haven assets. The sharp rise in Treasury bond yields further amplifies the rate divergence between the dollar and other currencies.
The positive corporate earnings season in the US has dispelled recession fears, giving the Federal Reserve members more confidence to maintain a tight monetary policy. The upcoming inflation data for July is expected to show an uptick from June, potentially supporting further bullish sentiment for the US dollar.
Technical View
Since mid-July, the US Dollar Index (DXY) has been on a short-term uptrend, currently testing key moving averages like the 50 and 200-dma. The Relative Strength Index (RSI) has consistently stayed above the 50 mark in the past 8 sessions, supporting bulls’ convictions. Additionally, the Moving Average Convergence Divergence (MACD) recently experienced a bullish crossover on July 21, returning above the zero line for the first time since mid-June.
The DXY is attempting to break through a significant resistance area, marked by the key moving averages and the 23.6% retracement level between 2023 lows and 2022 highs, positioned at 103.1. Overcoming this hurdle could lead to further upside, targeting levels at 103.6 (June highs) and 104.7 (May highs), with potential profit-taking expected around the 38.2% Fibonacci retracement level at 105.4.
Long USD/SEK:
- Entry: 10.60
- Take Profit: 11.20 (5.5%)
- Stop Loss: 10.46 (-2.2%)
- Risk/Reward Ratio: 2.77
Fundamental View
The Swedish krona (SEK) is highly sensitive to risk sentiment, and an increase in global market volatility puts downward pressure on the currency. The ongoing economic weakening in Europe adds another factor of weakness for high-beta currencies like the SEK. This week's upcoming data releases in Sweden, including industrial production, construction output, and household consumption, are particularly important, with the latter two already showing a clear contraction trend.
Technical View
USD/SEK has rebounded strongly after forming a triple bottom in mid-July. There is interesting upside potential as the pair has yet to decisively breach the 38.2% Fibonacci retracement level from the 2023 lows to the 2022 highs. RSI and MACD trending higher support the bullish momentum. The next significant resistance levels are located at 10.66 (38.2% Fibo), 10.82 (50% Fibonacci), and 10.98-11 (July highs, 61.8% Fibonacci, and psychological level). For a more aggressive stance, a target of 11.20 (78.6% Fibonacci) could be considered, with a stop loss set at 10.40, just below the 23.6% Fibonacci level.
Short XAG/USD:
- Entry: 23.46
- Take Profit: 21.50
- Stop Loss: 24.32
- Risk/Reward Ratio: 2.22
Fundamental View
Silver tends to suffer during periods of a strengthening dollar and rising Treasury yields. With China not making any major stimulative policy announcements, the demand for silver is facing challenging conditions, leaving it vulnerable to the movements of the dollar and interest rates.
Technical View
In the XAG/USD daily chart, the current picture sees silver testing the support of the bullish trendline that began in March 2023. In late June and early July, this support was also tested, and silver managed to hold and then rebound above the $25 mark. However, the momentum indicators are showing a different picture compared to July. The RSI is dangerously heading south, slipping below the 50 level, while the MACD has dipped below the zero line, following a bearish crossover with the signal line on August 1st.
Should the bearish outlook prevail, an interesting support zone lies between $21.5 and $22.1, corresponding to the support levels from mid-March and late June. Traders should closely monitor these technical levels as they may influence silver's price movements in the near term.
Trades from past weeks:
- Short EUR/CAD:
- Opened on July 31 at 1.4582
- Take Profit: 1.40
- Stop Loss: 1.48
- Profit & Loss: -0.8%
- Short EUR/USD:
- Opened on July 24 at 1.1085
- Take Profit: 1.0880
- Stop Loss: 1.1150
- Profit & Loss: +1%
- Short NZD/CAD:
- Opened on July 24 at 0.8174
- Take Profit: 0.7975
- Stop Loss: 0.8263
- Profit & Loss: +0.3%
- Long USD/CHF:
- Opened on July 17 at 0.86
- Take Profit: 0.89
- Stop Loss: 0.85
- Profit & Loss: +1.8%
- Long CHF/JPY:
- Opened on June 19 at 158.58
- Take Profit: 171.62
- Stop Loss: 152.5
- Profit & Loss: +2.4%
- Long EUR/JPY:
- Opened on May 8 at 149.16
- Take Profit: 160
- Stop Loss: 142
- Profit & Loss: +4.7%
