Last week's key event revolved around Fed Chair Jerome Powell's address at the annual symposium of the Kansas City Fed in Jackson Hole, Wyoming.
Forex Market Review: What Happened Last Week
During the speech, Powell's stance exhibited both hawkish and dovish elements. He hinted at the Federal Reserve's readiness to implement further rate hikes to steer inflation back to the targeted 2%. Additionally, he conveyed the possibility of the Fed maintaining current rates at the upcoming September meeting, pending evaluations of incoming data and the evolving outlook and associated risks.
In general, the outlook for interest rate hikes continues to be unclear, as market-based probabilities indicate a 20% likelihood of an increase in September and a roughly 50% likelihood by November. Nevertheless, what holds more conviction at present is the intention of major central banks to sustain elevated interest rates over an extended period to propel inflation toward its target.
Following the Jackson Hole Symposium, the U.S. dollar extended its remarkable streak, marking a sixth consecutive week of gains and attaining its highest point in 11 weeks.
In parallel, the euro and the pound encountered further depreciation. The pound experienced a decline of 1.2% against the greenback, positioning it as the poorest performer among G10 currencies for the week.
Disappointing PMI data, both in the UK and the Eurozone, fueled expectations that the Bank of England and the European Central Bank might cap interest rate increases at a level lower than initial projections. Moreover, the German economy's growth stagnated during the second quarter of 2023, following two consecutive negative quarters.
This week, investors will keep a close eye on the U.S. labor market report, which is going to be a key data impacting the Fed’s interest rate decision in September. Additionally, the PCE price inflation for July, the Fed’s favorite inflation gauge, and the second estimate of Q2 GDP growth will also be on the spotlight. Elsewhere, attention will be directed towards inflation rate data encompassing the Euro Area, Germany, France, Italy, Spain, Switzerland, and Australia.
Key Economic Events To Monitor This Week
United States:
- Non-farm payrolls (Friday): 170k expected, 187k previous
- Unemployment rate (Friday): 3.5% expected, 3.5% previous
- Core PCE Price Index (Thursday): 4.2% year-on-year expected, 4.1% previous
- Q2 GDP Growth Rate 2nd Estimate (Wednesday): 2.4% previous
- ISM Manufacturing PMI (Friday): 47 expected, 46.4 previous.
Euro Area:
- Inflation rate – Flash August (Thursday): 5.1% expected, 5.3% previous.
- Germany’s inflation rate – Flash August (Wednesday): 6% expected, 6.2% previous
- Germany GfK Consumer Confidence (Tuesday): -24.3 expected, -24.4 previous
Other Data To Follow:
- Canada’s Q2 GDP Growth Rate (Friday): 8% q/q previous
- Australia’s July inflation rate (Tuesday): 2% expected, 5.4% previous
- Switzerland’s July retail sales (Thursday): 1.8% previous
- Switzerland’s August inflation rate (Friday): 1.5% expected, 1.6% previous
- Switzerland’s August Mfg PMI (Friday): 40 expected, 38.5 previous.
Chart Of The Week: Dollar Index (DXY) Clinches Sixth Week of Upside, Swings into Positive Territory YTD
New Trades for The Week
Short EUR/JPY
- Entry: 158.04
- Take profit: 154.282
- Stop Loss: 159.60
- Risk/Reward Ratio: 2.5
Fundamental View:
The potential for further gains in the euro against the Japanese yen appears to have diminished, driven by emerging adverse economic indicators within the Eurozone and tempered expectations of ECB rate hikes. This led us to close our long EUR/JPY position, initiated in early May at 149.16, with a 6% profit.
PMI surveys in the Eurozone reveal a notable contraction in private sector activity, the most significant since November 2020. The upcoming week anticipates a decline in inflation and deteriorating consumer confidence in Germany, amplified by China's slowdown impact. Following a 12% year-to-date surge in EUR/JPY, its best performance since 2013, a pullback is now in order.
Technical view:
EUR/JPY's recent ascent to a 15-year peak on August 22 delivered a bearish signal through a diverging RSI, as the momentum gauge failed to mirror the fresh highs. This divergence likely signifies waning bullish strength, allowing bears to reenter the scene. The MACD registered a bearish crossover, although it remains above the zero line. A possibility of testing the 50-day moving average support at 156.75 during the initial days of the week is in the radar. Should this support falter, the short-term target of 154.28 emerges, aligning with the 23.6% Fibonacci retracement level between 2023's highs and lows. Fresh highs above 159.50 would prove the strategy invalid.
Add Long USD/CHF
- Entry: 0.8840
- Take Profit: 0.9250
- Stop Loss: 0.8680
- Risk/Reward Ratio: 2.5
Fundamental View:
USD/CHF demonstrated an intensified pace in its appreciation trajectory, attributed to the swifter-than-anticipated decline in macroeconomic fundamentals across Europe. The United States is poised for a week laden with pivotal data that might stimulate increased speculation about rate hikes, all the while Switzerland anticipates a decline in both inflation and the manufacturing PMI.
Technical View:
The USD/CHF exchange rate has surged beyond its 50-day moving average, achieving a positive streak of six consecutive weeks. Momentum indicators maintain the bullish outlook, as the RSI ascends beyond 50 and the MACD line consistently surpasses the signal line, now even breaching above the zero line. A significant test of the multi-resistance level at 0.90 may be in store for this week. This resistance encompasses the highs of mid-June to early July and constitutes 50% of the retracement from 2023's lows to highs. Following successful clearance of both 0.90 and 0.91, USD/CHF could potentially ascend towards 0.925, marked by the 76.8% Fibonacci level.
Short GBP/CAD:
- Entry: 1.7115
- Take Profit: 1.6707
- Stop Loss: 1.7296
- Risk/Reward Ratio: 2.3
Fundamental View:
The Canadian dollar continues to find support from the robustness of the US economy and the capacity of oil prices to sustain themselves around the $80 USD per barrel mark, even amid concerns of growth slowdown in China and Europe. This element serves to embolden the Canadian dollar bulls, while in the United Kingdom, economic challenges are mounting.
The manufacturing PMI has declined to 42.5, marking its lowest point since the pandemic-induced downturn in 2020. Additionally, the Services PMI has crossed into contraction territory, underscoring the increasing headwinds for the pound.
Technical View:
After a double top signal on August 22nd, GBP/CAD saw three consecutive bearish sessions and one flat, closing down 0.8% last week. A further bearish signal came from the MACD's bearish crossover, although the RSI still holds above 50.
Bears might now attempt to test the region between 1.7014 (encompassing the 50-day moving average and mid-August low) and 1.7040 (representing the 23.6% Fibonacci retracement). In the medium term, a bearish target could be set at 1.6706 (50% Fibonacci level), accompanied by a stop loss set at 1.7290.
Open trading ideas:
- Long USD/CAD
- Opened on August 21 at 1.35
- Take Profit: 1.3860
- Stop Loss: 1.3350
- Profit & Loss: +0.64%
- Long CHF/NOK:
- Opened on August 21 at 12.06
- Take Profit: 12.47
- Stop Loss: 11.89
- Profit & Loss: +0.2%
- Short AUD/JPY:
- Opened on August 21 at 93.10
- Take Profit: 87.10
- Stop Loss: 95.22
- Profit & Loss: -1.1%
- Short GBP/USD:
- Opened on August 14 at 1.2690
- Take Profit: 1.2310
- Stop Loss: 1.2850
- Profit & Loss: +0.7%
- Short NZD/JPY:
- Opened on August 14 at 86.70
- Take Profit: 83.50
- Stop Loss: 88.00
- Profit & Loss: +0.1%
- Short EUR/CAD:
- Opened on August 14 at 1.4730
- Take Profit: 1.4280
- Stop Loss: 1.49
- Profit & Loss: +0.3%
- Long U.S. Dollar Index (DXY):
- Opened on August 7 at 102.19
- Take Profit: 105.5
- Stop Loss: 100.90
- Profit & Loss: +1.8%
- Long USD/SEK:
- Opened on August 7 at 10.60
- Take Profit: 11.20
- Stop Loss: 10.46
- Profit & Loss: +3.9%
- Short NZD/CAD:
- Opened on July 24 at 0.8174
- Take Profit: 0.7975
- Stop Loss: 0.8263
- Profit & Loss: +1.6%
- Long USD/CHF:
- Opened on July 17 at 0.86
- Take Profit: 0.89
- Stop Loss: 0.85
- Profit & Loss: +2.7%
- Long CHF/JPY:
- Opened on June 19 at 158.58
- Take Profit: 171.62
- Stop Loss: 152.5
- Profit & Loss: +4.5%
