In ancient Japan, there was a brilliant rice trader named Munehisa Homma. He had a unique talent for predicting future price movements in the rice markets. How did he do it? Well, he closely observed market prices and studied the emotions of fear and greed among traders. This keen observation led him to create something groundbreaking – the candlestick chart.
Homma’s candlestick chart displayed the open, high, low, and close prices over specific time periods, giving traders a visual representation of price movements. This innovation caught on quickly and spread throughout Japan, revolutionising trading.
Fast forward to the late 19th century when Charles Dow, a co-founder of Dow Jones & Company and the Wall Street Journal, encountered Japanese candlestick charting. Impressed by its potential, he brought it to the Western world, where it further evolved.
Over time, Technical Analysis, as it came to be known, saw the addition of the Elliott Wave Theory and benefited greatly from advancements in technology. Traders gained access to sophisticated charting software and a wide range of technical indicators.
Today, Technical Analysis remains a favoured approach in Forex trading. It allows traders to make informed decisions based on data-driven insights, empowering them to navigate the dynamic and ever-changing markets with confidence.
Understanding Technical Analysis
Imagine being a detective, deciphering hidden clues in the financial market to predict its next move. That’s precisely what Technical Analysis does for traders! It’s a fascinating discipline that involves diving into historical market data, with a keen focus on price charts and trading volumes. But wait, there’s more!
While Fundamental Analysis looks at economic indicators and financial reports, Technical Analysis takes a different route. It operates on the belief that everything you need to know about an asset is already encoded in its price. It’s like the market’s secret language waiting to be decoded.
Traders who wield Technical Analysis skills study the past price patterns, seeking clues and hints about the future. They are the Sherlock Holmes of the trading world, spotting trends and potential trade opportunities with precision.
Through this powerful analytical approach, traders get a glimpse into the market’s underlying sentiment. They understand when it’s giddy with optimism, paralysed by fear, or in the grip of uncertainty. Armed with these insights, they make informed decisions about the perfect moment to enter or exit trades.
So, why does this matter so much? In the fast-paced world of Forex trading, timing is everything. Technical Analysis gives traders the edge they need to navigate through the turbulence of the market, making well-timed moves and staying ahead of the game. It’s no wonder Technical Analysis is a favourite among traders who love the thrill of decoding the market’s mysteries and reaping rewards from their astute predictions.
Basic Concepts of Technical Analysis
To navigate the dynamic world of financial markets effectively, traders must grasp the foundational concepts of Technical Analysis. These core principles provide a deeper understanding of market dynamics and empower traders to make well-informed decisions.
Price Charts
Price charts serve as the bedrock of Technical Analysis, offering a visual representation of historical price movements of currency pairs over specific timeframes. Among the commonly used charts are candlestick and line charts.
Candlestick charts present a wealth of information, revealing open, high, low, and close prices within a designated timeframe. On the other hand, line charts provide a simplified view, showcasing only the closing prices. Understanding these charts enables traders to spot patterns, trends, and potential turning points in the market.
source: Britannica Money
Timeframes
Mastering different timeframes is essential for traders to adapt their strategies to various market conditions.
Timeframes vary from ultra-short periods, such as seconds or minutes, favoured by intraday traders seeking rapid profit opportunities, to longer-term perspectives like daily or weekly, preferred by investors aiming to capture substantial trends.
Analysing price action across multiple timeframes offers a comprehensive view of market behaviour, facilitating well-timed entries and exits.
Support and Resistance
The concepts of support and resistance levels are invaluable tools for traders seeking to identify crucial price levels in the market.
Support refers to price zones where demand is strong enough to halt a downtrend, acting as a price floor. Conversely, resistance denotes areas where supply is abundant enough to prevent an uptrend from continuing, creating a price ceiling.
Recognising these levels empowers traders to make strategic decisions, such as placing stop-loss and take-profit orders and enables them to anticipate potential trend reversals.
Trend Lines
Trend lines are powerful aids in understanding market direction and momentum. By drawing straight lines connecting consecutive peaks or troughs on a price chart, traders gain insights into the prevailing trend – whether it is upward, downward, or sideways.
Trend lines help traders identify key support and resistance levels, confirm trend strength, and anticipate potential breakout or reversal points. Understanding trend lines enhances traders’ ability to ride trends and capitalise on market opportunities.
Basic Chart Patterns
In Technical Analysis, chart patterns play a significant role in providing insights into potential market reversals or continuations. These patterns are recognised for their ability to signal shifts in market sentiment. Let’s explore some common chart patterns that traders frequently encounter:
Technical Analysis encompasses a variety of chart patterns, each carrying its own unique implications. Some well-known patterns include the Head and Shoulders, Double Tops, Double Bottoms, and Triangles. Understanding these patterns can help traders anticipate potential changes in market direction and identify trading opportunities.
The key to effective trading lies in accurately identifying chart patterns. Each pattern provides important information about the balance between buyers and sellers. By mastering pattern recognition, traders can gain insights into potential price targets and develop informed trading strategies.
Moreover, chart patterns are often accompanied by volume trends, which can serve as additional confirmation of their validity. Volume, reflecting the number of shares or contracts traded in a given period, can complement pattern analysis and help assess the strength of signals. Integrating both chart patterns and volume analysis empowers traders to make well-considered decisions when executing trades.
Technical Indicators
Technical indicators are mathematical calculations derived from price, volume, or open interest data. Their primary purpose is to aid traders in confirming trends, measuring momentum, and identifying potential buy or sell signals.
source: Britannica Money
There is an array of technical indicators available to traders, each serving a unique purpose. Moving Averages help smooth out price data and indicate trend direction. The Relative Strength Index (RSI) measures overbought or oversold conditions, while the Moving Average Convergence Divergence (MACD) highlights changes in a trend’s strength and direction.
Interpreting indicators involves analysing their values in conjunction with price patterns and other relevant market factors. Divergence between an indicator and price movement can also provide valuable insights into potential shifts in market sentiment.
Pros & Cons of Technical Analysis
Mastering the art of trading involves understanding the strengths and limitations of various analytical approaches. Technical Analysis, a popular method used by traders worldwide, offers its fair share of advantages and drawbacks.
Pros:
Accessibility: Technical Analysis is renowned for its accessibility, catering to traders of all experience levels. With a wealth of educational resources available, beginners can quickly grasp its concepts and apply them to their trading endeavours.
Visual Representation: Price charts and technical indicators act as valuable visual aids, providing traders with an intuitive representation of market trends and patterns. The visual nature of Technical Analysis simplifies data interpretation and supports informed decision-making.
Wide Range of Indicators: The diverse selection of technical indicators empowers traders to customise their analyses to adapt to various market conditions and trading styles. This flexibility allows for a more personalised and adaptable approach to trading.
Cons:
Subjectivity: Technical Analysis entails interpreting patterns and indicators, making it susceptible to subjectivity. Different traders may draw varying conclusions from the same data, leading to a degree of interpretation variance.
Historical Based: Technical Analysis primarily relies on historical price data, which may not fully account for unforeseen events or sudden shifts in market sentiment. As a result, abrupt market changes can challenge the accuracy of technical predictions.
Limited Scope: Relying solely on Technical Analysis might overlook crucial fundamental factors that significantly influence currency movements. Neglecting these fundamental aspects can lead to incomplete market analyses and trading decisions.
Tips for Using Technical Analysis in Forex Trading
To leverage Technical Analysis in the Forex market effectively, follow these key tips:
Master the Basics: Understand key concepts like price charts, trend lines, and support/resistance levels.
Combine Indicators: Use a mix of indicators and chart patterns for stronger analysis.
Choose Timeframes Wisely: Select the right timeframe that suits your trading style.
Be Patient and Disciplined: Avoid impulsive decisions and wait for clear signals.
Implement Risk Management: Set stop-loss and take-profit orders to protect your capital.
Stay Informed: Keep an eye on market news and events that may impact your analysis.
Backtest Strategies: Test your strategies on historical data before live trading.
Avoid Overtrading: Stick to your trading plan and avoid excessive trades.
Maintain a Trading Journal: Record your trades and learn from your experiences.
Keep Learning: Stay updated with new developments in Technical Analysis and Forex trading.
In conclusion, Technical Analysis is an invaluable tool in the world of Forex trading, empowering traders with insights into market trends and potential trading opportunities. By mastering basic concepts, recognising chart patterns, and effectively using technical indicators, traders can make more informed decisions. However, it is crucial to combine Technical Analysis with other analytical methods and apply sound risk management practices to navigate the complexities of Forex trading successfully.
Summary:
Technical Analysis decodes the market’s language using historical data and price charts.
Core concepts include price charts, timeframes, support/resistance, trend lines, and chart patterns.
Technical indicators confirm trends and identify buy/sell signals.
Technical Analysis offers pros such as accessibility, visual representation, and a wide range of indicators, but it has cons like subjectivity, reliance on historical data, and limited scope.
Combining Technical Analysis with other methods and risk management enhances trading success.
The Dow Jones Industrial Average commenced the week with a robust surge of 1.16%, gaining 407.51 points to conclude at 35,473.13, marking its most substantial upswing since June 15. Buoyed by a nearly 4% rally from Amgen, the blue-chip index received a notable boost. In tandem, the S&P 500 climbed by 0.9% to settle at 4,518.44, while the Nasdaq Composite posted a more modest 0.61% increase, curtailed by a near 1% dip in Tesla shares following the departure of CFO Zach Kirkhorn. Both the Nasdaq and S&P 500 managed to break their four-day losing streaks.
Berkshire Hathaway exhibited a remarkable ascent of over 3%, reflecting investor contentment with the company’s financial results and robust cash reserves. Notably, shares of both A and B share classes reached unprecedented levels. Elanco, a player in the animal healthcare sector, surged by 4% after surpassing Wall Street expectations, whereas Tyson Foods faltered by 3.8% on the back of a less-than-anticipated report. In another significant development, Sovos Brands, recognized for Rao’s, witnessed a remarkable surge of more than 25% after Campbell Soup’s announcement of its acquisition of the pasta sauce manufacturer. While Campbell Soup’s shares slipped by approximately 1.8%, they settled at their lowest price in over a year. Following a challenging week on Wall Street, marked by a 2.9% slide in the Nasdaq Composite and a 2.3% dip in the S&P 500, the market rebounded with renewed vigor.
This resurgence was attributed to a stronger-than-expected corporate earnings season, with around 80% of S&P 500 companies surpassing Wall Street forecasts. According to Chris Zaccarelli, Chief Investment Officer of the Independent Advisor Alliance, the market has regained a “risk-on mode” due to the favorable earnings trend. Looking ahead, investors are poised to focus on the impending release of consumer and producer price index data for July, as these indicators hold crucial implications for inflation trends and economic well-being.
On Monday, across all sectors, the market showed a notable uptick of 0.90%. Particularly strong gains were observed in the Communication Services sector, which surged by 1.88%, followed closely by Financials with a rise of 1.36%, and Industrials, which advanced by 1.26%. Real Estate also exhibited a solid increase of 1.21%, while the Health Care sector saw a rise of 1.18%. Noteworthy gains were recorded in the Consumer Discretionary sector, which climbed by 1.10%, and the Consumer Staples sector, which experienced a respectable growth of 0.85%. Materials exhibited a modest uptrend of 0.70%. However, the Information Technology sector displayed a more subdued increase of 0.27%, and the Energy sector had a marginal rise of 0.15%. In contrast, the Utilities sector showed a slight decline of -0.02% during the same trading period.
Major Pair Movement
The dollar index initially rebounded on Monday from the previous slide triggered by Friday’s jobs report, yet it remained relatively unchanged as shorter-term Treasury yields decreased. The upcoming U.S. inflation report on Thursday could potentially affirm the belief that the Federal Reserve’s tightening cycle has concluded, increasing the likelihood of rate cuts in 2024. The recent jobs report offered conflicting signals regarding the labor market’s condition and the necessity for further Fed tightening, contributing to market uncertainty. While the labor market is gradually loosening, the exact timing of a significant shift and subsequent Fed rate cuts remains uncertain, especially considering the economy’s resilience despite substantial rate hikes by the Fed.
Market confusion persists over the necessity of tight policy, irrespective of the labor market’s status, particularly if inflation continues its trajectory towards the Fed’s target. Monday saw contrasting policy outlooks from Fed officials Bowman and Williams, hinting at a potential pause by the Fed until clearer indications emerge for a more or less restrictive approach. The impending Consumer Price Index (CPI) release on Thursday could play a pivotal role in resolving this policy divergence. In the currency markets, EUR/USD dipped slightly by 0.05%, unable to surpass Friday’s initial post-payrolls highs. The European Central Bank’s assessment of peaking underlying inflation and concerns over economic growth, amplified by Chinese economic uncertainties, could impact the probability of another ECB rate hike. USD/JPY, on the other hand, rose by 0.5% as buyers entered the market above 141.50 following post-payrolls lows. Despite the Bank of Japan’s hopeful stance on rising wages, low Japanese Government Bond yields continue to contrast with higher U.S. Treasury yields. Sterling managed to gain 0.3% after a hesitant start, supported by a rise in 2-year gilts-Treasury yields spreads and the maintenance of essential support levels following the Bank of England’s recent rate hike.
Picks of the Day Analysis
EUR/USD (4 Hours)
EUR/USD Rises Amid Weaker Dollar and Market Focus on US Inflation Data
The EUR/USD pair rebounded to 1.1000 during the American session, propelled by a weakened US dollar and improved risk appetite. While Monday brought relative calm to financial markets, attention remains fixed on the upcoming US inflation figures later in the week. Germany’s Industrial Production data for June displayed a larger-than-expected contraction of 1.5%, diverging from the projected -0.4% decline. Meanwhile, Eurozone Sentix Investor Confidence showed recovery, reaching -18.9 from -22.5. In the coming days, the spotlight shifts to Germany’s final Consumer Price Index (CPI) report for July, anticipated to reflect an unchanged annual rate of 6.2%.
Market sentiment revolves around the possibility of an impending rate hike by the European Central Bank (ECB), though the September meeting might not be the venue for such action. While the likelihood of a rate hike remains below 50% for September, odds increase to 60% for October, as indicated by the interest rate market. The EUR/USD’s trajectory continues to hinge on the performance of the US Dollar, which posted mixed results on Monday following the Non-Farm Payrolls (NFP) report-induced decline on Friday. The upcoming US inflation data release on Thursday and Friday takes center stage, with the US Dollar Index exhibiting a bearish bias in the short term, tempered by the underlying strength of the US economy.
Based on technical analysis, the EUR/USD remained steady on Monday as the market awaited upcoming US inflation data for the week, specifically CPI and PPI, while also attempting to move toward the middle band of the Bollinger Bands. Right now, the price is slightly above the middle band, creating a small gap between the upper and lower bands of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 50, showing that the EUR/USD is in a phase of consolidation.
Resistance: 1.1038, 1.1121
Support: 1.0915, 1.0839
XAU/USD (4 Hours)
XAU/USD Retreats as USD Gains Momentum Amid Fed Tightening Concerns
The XAU/USD pair experienced a reversal in its recent gains as the US Dollar gained strength, trading at around $1,933 per troy ounce after the close of London’s session. Concerns over the Federal Reserve’s ongoing tightening measures in the new week led to a risk-averse shift in financial markets. While the USD’s rally paused prior to Wall Street’s opening, comments from Fed’s New York President John C. Williams provided some reassurance, emphasizing data-dependency for any future rate adjustments. As Wall Street saw upward momentum, particularly reflected in the Dow Jones Industrial Average’s rise by approximately 350 points, the precious metal faced downward pressure. In the week ahead, market attention will be focused on the US Consumer Price Index (CPI) data for July, with potential implications for USD sentiment depending on the outcome relative to expectations.
Based on technical analysis, the XAU/USD faced a small decrease on Monday, aiming to get closer to the lower band of the Bollinger Bands. Right now, the price is a bit above the lower band in the Bollinger Bands setup. The Relative Strength Index (RSI) is at 40, indicating that the XAU/USD pair has a somewhat negative outlook.
Several key market events are expected to influence the financial markets this week. Specifically, the highly awaited US Consumer Price Index and Producer Price Index will be released. In light of these crucial announcements, we advise traders to approach their trading preparations with caution, considering the potential for heightened market volatility.
Here are some key economic highlights to keep an eye on during the week:
New Zealand Inflation Expectations (9 August 2023)
Inflation expectations in New Zealand declined to 2.79% in Q2 2023 from 3.3% in Q1 2023.
The figures for Q3 2023 will be released on 9 August, with analysts expecting another decrease to 2.5%.
US Consumer Price Index (10 August 2023)
Consumer prices in the US rose 0.2% month-over-month in June 2023 after a 0.1% increase in the previous month.
Analysts anticipate a 0.2% rise in the figures for July, scheduled for release on 10 August.
UK Gross Domestic Product (11 August 2023)
The British economy shrank by 0.1% month-over-month in May 2023, following a 0.2% growth rate in April.
The figures for June are set to be released on 11 August, with analysts expecting the country’s GDP to grow by 0.1%.
US Producer Price Index (11 August 2023)
Producer prices for final demand in the US edged up 0.1% month-over-month in June 2023, following a 0.4% fall seen in May.
The data for July 2023 will be released on 11 August, with analysts expecting a 0.2% increase.
University of Michigan Consumer Sentiment Index (11 August 2023)
The University of Michigan consumer sentiment for the US was revised lower to 71.6 in July 2023 from a preliminary reading of 72.6. It was the highest reading since October 2021 due to the continued slowdown in inflation along with the stabilisation of labour markets.
Analysts expect a reading of 70.9 in the upcoming set of data, due for release on 11 August.
The S&P 500 continued its decline for a third day in a row, grappling with the impact of rising bond yields and mixed corporate earnings results. The index fell 0.25%, closing at 4,501.89, while the Dow Jones Industrial Average also lost 0.19%. The Nasdaq Composite inched down by 0.1% at the end of the trading day. The surge in the benchmark 10-year Treasury yield, reaching around 4.18% – its highest since November 2022, added pressure to the real estate sector and resulted in a spike in the Cboe Volatility index. Utilities were also impacted, losing 2.3%.
Some experts on Wall Street highlighted that the market had been overdue for a pause or minor correction, following months of bullish performance. The recent trend of eroding momentum raised concerns, although the longer-term outlook remained positive. The week’s busy earnings reports included chipmaker Qualcomm, which saw an 8.2% drop after disappointing results, and PayPal, which shed 12.3% despite posting in-line results. Meanwhile, Expedia experienced a significant plunge of 16.4% as its gross bookings fell short of expectations.
The market’s focus shifted to tech giants Apple and Amazon, set to release their earnings reports after trading hours. So far, approximately 79% of S&P 500 companies have issued quarterly reports, with around 82% surpassing expectations, but overall earnings are expected to be about 5% lower than the previous year. In the midst of these developments, the Bank of England raised interest rates by 25 basis points to tackle inflation. Additionally, Wall Street kept a close eye on economic data, including weekly jobless claims and second-quarter productivity figures, which showed slight improvements.
On Thursday, the overall market declined by 0.25%. The energy sector showed a notable gain of 0.95%, while consumer discretionary and financial sectors also saw modest increases of 0.34% and 0.07%, respectively. On the other hand, the real estate and utilities sectors experienced significant losses of 1.35% and 2.29%, respectively. Additionally, the information technology sector declined by 0.32%, health care by 0.50%, and industrials and materials both dropped by 0.61% and 0.60%, respectively. Communication services and consumer staples also faced minor declines of 0.17% each.
Major Pair Movement
The dollar index experienced a 0.11% decline, led by a 0.48% loss in USD/JPY, as mixed U.S. data weighed on market sentiment ahead of Friday’s employment report. The dollar’s recent recovery was interrupted due to rising Treasury yields compared to bunds, JGBs, and gilts, though it had already recovered most of its late June to July slide. The markets eagerly awaited Friday’s jobs report to gauge its potential impact on monetary policy.
During Thursday’s trading, long dollar positions were squared off, partly driven by signs that the recent surge in longer-term Treasury yields might have reached a near-term peak. EUR/USD rebounded slightly, while USD/CNH and USD/JPY experienced losses, contributing to profit-taking on long dollar positions. The sharp fall in the yen was influenced by the Bank of Japan’s decision to double the hard cap on 10-year JGB yields, raising concerns over potential Japanese selling of Treasury holdings. Sterling remained flat after the Bank of England’s 25bp rate hike, which fell short of expectations for a 50bp hike. Additionally, Brent and WTI crude oil prices rose following Saudi Arabia’s decision to extend production cuts, impacting USD/NOK and AUD/USD.
EUR/USD Stays Steady Ahead of US Employment Data Despite Limited Market Impact
The EUR/USD remained flat during a quiet session, trading around 1.0940, as investors awaited crucial US employment data. On the economic front, Germany reported lower-than-expected June exports and imports, while Eurostat revealed a decline in the Producer Price Index (PPI) for the Euro area. The Bank of England’s rate hike initially boosted EUR/GBP, but gains were later reversed. In the US, data on initial Jobless Claims and Unit Labor Costs were released, with focus shifting to the upcoming Nonfarm Payrolls report, expected to show an increase of 200,000 jobs.
According to technical analysis, the EUR/USD remained flat on Thursday as the market awaited today’s US Non-farm data, reaching the middle band of the Bollinger Bands. Currently, the price is moving at the middle band, creating a narrow gap between the upper and lower bands of the Bollinger Bands. The Relative Strength Index (RSI) currently stands at 44, suggesting that the EUR/USD is back in consolidation mode. Please be aware that we expect high volatility in the EUR/USD today as the US Non-Farm data will be released.
Resistance: 1.1038, 1.1121
Support: 1.0915, 1.0839
XAU/USD (4 Hours)
XAU/USD Consolidates Losses as US Dollar Strength Persists Amid Labor Market Concerns
On Thursday, XAU/USD traded in the $1,930 price zone, consolidating losses after hitting its lowest point in almost a month at $1,929.48 per troy ounce. The decline was attributed to the continued strength of the US Dollar, which benefited from a somber market sentiment, leading to increased government bond yields and impacting equities. Market players are worried that the tight US labor market will prompt the Federal Reserve to maintain its tightening path for a longer duration than expected. Despite signaling at least one more rate hike, uncertainty prevails as tepid economic indicators suggest a possible pause. The July Nonfarm Payrolls Report (NFP) is eagerly awaited to gain more clarity on the employment situation in the US.
According to technical analysis, on Thursday, the XAU/USD remained flat, with the upper and lower bands of the Bollinger Bands moving closer together. Currently, the price is slightly below the middle band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 39, indicating that the XAU/USD pair is still slightly bearish.
A selloff gripped the stock market on Wednesday as the Nasdaq Composite suffered its worst day since February. The downturn was triggered by Fitch Ratings’ decision to downgrade the long-term rating for the U.S. from AAA to AA+, citing concerns about the expected fiscal deterioration over the next three years. This move fueled risk-off sentiment, causing the tech-heavy index to plummet by 2.17% and the S&P 500 to retreat by 1.38%. Leading the declines were technology stocks, including major players like Amazon, Alphabet, and Microsoft, which saw their share prices drop by more than 2% each. The 10-year Treasury yield also surged to its highest level since November, further exacerbating the sell-off.
Despite the rating downgrade, some experts viewed the market correction as a natural part of the market cycle after an extended period of growth. The economy demonstrated resilience, and conditions were notably different compared to the last time the U.S. experienced a rating downgrade. Earnings season proved robust, with approximately 82% of S&P 500 companies reporting positive surprises. While the downgrade did impact investor sentiment, many remained optimistic about the overall economic outlook and market trends, considering the selloff as a constructive rotation rather than a sign of an imminent market downturn.
On Wednesday, the overall stock market experienced a decline of 1.38%. Among the sectors, Consumer Staples showed a slight increase of 0.25%, while Health Care gained 0.06%. On the other hand, the Communication Services sector suffered the most significant drop of 2.07%, closely followed by Information Technology, which declined by 2.59%. Other sectors that experienced losses were Energy (-1.34%), Materials (-1.23%), Consumer Discretionary (-1.84%), Industrials (-1.08%), Financials (-0.89%), Real Estate (-0.44%), and Utilities (-0.01%).
Major Pair Movement
The dollar index surged by 0.5% as a safe-haven response to Fitch’s U.S. credit downgrade and positive ADP data boosted investor confidence. Despite stock market losses leading to a decline in Treasury yields, traders awaited upcoming ISM non-manufacturing and employment reports, considered better indicators of economic growth and the labor market. The chances of further Fed rate hikes remained low, and the rebound in Treasury yields was driven by higher longer-term tenors due to the Treasury’s unexpected borrowing plans. Although Fitch’s credit downgrade and increased borrowing estimates created concerns, portfolio managers were less likely to exit Treasury holdings due to the continued backing of the U.S. government.
EUR/USD experienced a 0.34% decline, approaching the uptrend line from May, reflecting worries about economic weaknesses in Germany and China versus hopes for a soft landing in the U.S. Market expectations showed limited possibilities of further ECB hikes and a higher peak for the Fed’s rates. USD/JPY initially dropped on haven yen gains following the Fitch news but later recovered as JGB yields rose despite BoJ buying. Sterling faced losses earlier but recovered slightly after a poll showing lower UK public inflation expectations. A 25bp hike was favored over a 50bp one in the upcoming BoE meeting due to higher inflation levels in the UK compared to the ECB and the Fed. The Australian dollar and yuan both depreciated against the dollar due to risk-off sentiment and uncertainty about Chinese economic stimulus plans.
Looking ahead, investors were awaiting several key economic reports on Thursday, including Challenger layoffs, jobless claims, ULC, and factory orders, as a prelude to Friday’s jobs report. These data points were expected to provide further insights into the state of the economy and may impact market sentiment and the performance of various currencies.
Picks of the Day Analysis
EUR/USD (4 Hours)
EUR/USD Breaks Key Support Levels Amid Strong US Dollar Performance and Risk Aversion
The EUR/USD pair experienced a significant drop below key support levels, reaching 1.0919, the lowest since July 7, due to the US dollar’s robust performance and risk aversion triggered by Fitch’s downgrade of the US sovereign rating. Despite initial gains after the announcement, the pair resumed its downward trend as the US dollar strengthened, breaking below 1.0960. The US Dollar Index rose to a four-week high above 102.50 following positive labor market data, with private employment increasing by 324K according to ADP. More US employment data is expected, making it crucial for market sentiment. On the horizon, Germany’s trade balance data, service PMIs, Eurostat’s Producer Price Index, and the Bank of England’s decision will be critical for the Euro’s performance.
According to technical analysis, the EUR/USD moved slightly lower on Wednesday and reached the lower band of the Bollinger Bands. Currently, the price is slightly above the lower band of the Bollinger Bands. The Relative Strength Index (RSI) currently stands at 34, suggesting that the EUR/USD is starting to move lower, indicating a bearish mode.
Resistance: 1.1038, 1.1121
Support: 1.0915, 1.0839
XAU/USD (4 Hours)
XAU/USD Faces Volatility Amid Mixed Market Sentiment and Encouraging US Data
The XAU/USD pair experienced volatility as market sentiment fluctuated and encouraging US data supported the US Dollar. Peaking at $1,954.81 per troy ounce, the pair currently trades around $1,935. The dismal market mood, driven by Fitch’s US debt rating downgrade and debt ceiling turmoil, contributed to risk-off sentiment, leading to red global indexes and a rally in government bond yields. However, the US Dollar recovered its poise after the release of positive ADP Employment Change data, showing the private sector added 324K new job positions in July, surpassing market expectations. As the labor market remains tight, speculation grows about further monetary tightening by the Federal Reserve, impacting the XAU/USD pair’s performance amid mixed outlooks and cautious optimism.
According to technical analysis, the XAU/USD fell on Wednesday and reached the lower band of the Bollinger Bands. Currently, the price is moving slightly above the lower band of the Bollinger Bands. The Relative Strength Index (RSI) currently stands at 36, which suggests that the XAU/USD pair is slightly bearish.
Starting in August, the S&P 500 experienced a 0.27% decline, with the Nasdaq Composite also dropping by 0.43%, while the Dow Jones Industrial Average gained 0.2%. Several companies reported mixed results, leading to varied stock movements. Pharmaceutical giant Merck pulled back 1.3% despite exceeding revenue expectations, while Caterpillar’s strong results boosted shares by 8.9%. On the other hand, Pfizer fell 1.2% due to declining Covid product sales, and Uber slid 5.7% on mixed earnings. JetBlue also tumbled 8.3% after reducing its guidance due to slowing domestic travel.
Market analysts attributed these fluctuations to overbought conditions, given the market’s strong performance this year and solid quarterly earnings. Despite over 160 S&P 500 constituents reporting second-quarter results, with 82% exceeding earnings expectations, analysts anticipate a 7.1% earnings decline from a year ago and a third consecutive quarter of falling profits. Economic indicators, including job openings data and manufacturing data showing a continued contraction, were also closely assessed by Wall Street.
On Tuesday, all sectors experienced a 0.27% decline, except for Industrials, which rose by 0.32%, and Information Technology, which saw a slight increase of 0.09%. Financials and Real Estate both dipped by 0.03% and 0.13%, respectively. Communication Services and Materials experienced greater losses, with declines of 0.29% and 0.44% respectively. The Energy sector suffered a 0.46% decrease, while both Consumer Staples and Health Care declined by 0.51%. The Consumer Discretionary sector faced the most significant setback, with a notable 1.15% decline, and Utilities also experienced a considerable 1.26% drop.
Major Pair Movement
EUR/USD is trading lower due to influences from China’s yuan and U.S. interest rates. The yuan’s recent appreciation against the dollar stalled, raising concerns about China’s economy and leading to yuan selling. Eurozone data also indicates a slowdown, potentially resulting in a less hawkish ECB stance and weighing on EUR/USD rates.
U.S. yields remain elevated, and investors expect the Fed to keep rates higher for longer, increasing the dollar’s yield advantage over the euro. Key U.S. data risks are in focus, and upbeat data could further support U.S. rates and the dollar. USD/CAD eyes cloud base support at 1.3311 amid a gloomy global growth outlook, while GBP/USD faces relentless bearish pressure as the BoE’s more-hawkish rate outlook diminishes. USD/JPY is on track to revisit June’s 2023 peak with support at 142. Resilient U.S. data and a soft landing narrative are expected to strengthen the USD.
Picks of the Day Analysis
EUR/USD (4 Hours)
EUR/USD Holds Above Support Amid Mixed Data and Resilient Dollar
The EUR/USD dropped towards last week’s lows but rebounded during the American session, staying above the crucial support area of 1.0950. The US Dollar remains resilient, but its momentum against the Euro appears to be fading. The Final Eurozone PMI showed little change, while Germany’s unemployment rate fell to 5.6% in July. However, the interest rate market indicates low odds of another rate hike from the ECB. The Greenback lost strength against the Euro following mixed US data, with the JOLTS Job Openings report and ISM Manufacturing PMI coming in below expectations. Despite the numbers, US yields saw modest increases. The market focus now shifts to upcoming US employment data, including the ADP report and Nonfarm Payrolls on Friday.
According to technical analysis, the EUR/USD moved slightly higher on Tuesday and reached the middle band of the Bollinger Bands. Currently, the price is still at the middle band of the Bollinger Bands, indicating that the EUR/USD is in a consolidating mode. The Relative Strength Index (RSI) currently stands at 43, suggesting that the EUR/USD is starting to move back to a neutral stance.
Resistance: 1.1038, 1.1121
Support: 1.0915, 1.0839
XAU/USD (4 Hours)
XAU/USD Rebounds on US Credit Rate Cut Amid Economic Concerns
Gold has rebounded to around $1,950 in the Asian session after justifying the United States government’s rate cut by Fitch Ratings. The metal pared previous losses, but technical indicators suggest a bearish trend in the near term. The market sentiment turned negative due to disappointing earnings from big names, leading to a surge in demand for the safe-haven US Dollar. Additionally, US data disappointed, with manufacturing PMI missing estimates. The situation remains uncertain, and investors are closely watching employment clues for further market direction.
According to technical analysis, the XAU/USD fell on Tuesday and is now approaching the lower band of the Bollinger Bands. Currently, the price is moving in the middle between the lower and middle bands of the Bollinger Bands, indicating that there is still potential for Gold to move lower and reach the lower band. The Relative Strength Index (RSI) currently stands at 45, which suggests that the XAU/USD pair is in a neutral stance but slightly bearish.
Stocks on Wall Street experienced a modest rise on Monday, kickstarting a busy earnings week and concluding a winning month. The Dow Jones Industrial Average climbed 0.28% to close at 35,559.53, while the S&P 500 and Nasdaq Composite registered slight gains of 0.15% and 0.21%, respectively. July’s positive performance was notable, with the S&P 500 recording its fifth consecutive positive month for the first time since August 2021, and the Nasdaq Composite marking its fifth straight winning month since April 2021. This bullish trend was attributed to investors’ growing optimism about a soft landing scenario, supported by strong economic data indicating ongoing labor market strength and cooling inflation. Better-than-expected second-quarter earnings also contributed to the market’s rally throughout the month.
Looking ahead, market participants are closely monitoring the earnings reports of tech giants Amazon and Apple, as their performance could significantly impact the market’s trajectory. Positive guidance from these companies may propel the bull market further and sustain momentum into the fall. Alongside earnings, investor focus remains on the upcoming jobs report, with economists projecting the U.S. economy to have added 200,000 jobs in July, following a 209,000 increase in nonfarm payrolls in June. These factors, along with the Federal Reserve’s recent rate hike, will continue to influence investors’ decisions and shape the market’s direction as the earnings season nears its end.
On Monday, the overall stock market showed a modest increase of 0.15% across all sectors. Energy stocks saw the most significant gain, surging by 2.00%, followed by real estate with a rise of 0.70%. The consumer discretionary and materials sectors also performed well, each recording gains of 0.56% and 0.52%, respectively. Financials and industrials showed moderate growth with increases of 0.44% and 0.23%, while information technology and utilities experienced more modest gains at 0.13% and 0.03%, respectively. On the other hand, communication services and consumer staples sectors experienced slight declines, both decreasing by -0.03% and -0.46%, respectively. The health care sector saw the most significant decrease, falling by -0.79%.
Major Pair Movement
On Monday, the dollar slightly declined against the euro and sterling, as these currencies rebounded from July lows following below-forecast U.S. core PCE and ECI data, which suggested a lower likelihood of further rate hikes by the Federal Reserve. Despite Chair Jerome Powell’s emphasis on data dependence, rate cuts are deemed unlikely this year. The yen weakened for a second day against most other currencies, driven by yen longs taken before the Bank of Japan’s (BoJ) meeting, where the policy shift underwhelmed expectations. The BoJ’s purchase of 10-year Japanese Government Bonds (JGBs) at 60bps, closer to its prior 50bp cap than the new hard cap at 100bps, led to renewed quantitative easing and favored the yen as a funding currency.
In the foreign exchange market, USD/JPY, EUR/JPY, GBP/JPY, and AUD/JPY all rose, while USD/CNH fell slightly as investors remained cautious about China’s renewed growth prospects. Bond yields, including Bunds, gilts, and Treasury yields, initially rose due to JGB yields’ post-BoJ meeting surge, but they later drifted lower as the month-end and key U.S. data approached.
Picks of the Day Analysis
EUR/USD (4 Hours)
EUR/USD Pulls Back Below 1.1000 Despite Eurozone’s Return to Growth
On Monday, the EUR/USD currency pair failed to maintain its gains and retreated, falling below the key level of 1.1000. The Euro initially gained momentum after Eurozone economic data revealed growth in the second quarter, but it couldn’t reclaim the 20-day Simple Moving Average (SMA) and eventually weakened. Eurostat reported that the GDP grew by 0.3% in Q2, surpassing market consensus expectations of 0.2%, while headline inflation decreased from 5.5% to 5.3% YoY in line with predictions. However, the core inflation rate remained higher than expected at 5.5%. In contrast, German retail sales disappointed, showing a 0.8% drop in June against a forecasted 0.2% decline.
The mixed data released for the European Central Bank (ECB) implies no significant shifts in monetary policy, as inflation slowed while the core rate remained elevated, and GDP experienced marginal growth. Market pricing currently suggests that the likelihood of another rate hike during the September meeting is below 40%. In the US, the Dollar displayed a mixed performance on Monday, rising against the Euro, Pound, and Yen, but weakening against the Australian Dollar, Canadian Dollar, and New Zealand Dollar, possibly indicating some risk appetite and a rebound in commodity prices. This week, market participants await a series of labor market data releases, including JOLTS Job Openings, ADP, Jobless Claims, and Nonfarm Payrolls, which could influence the currency’s movements.
According to technical analysis, the EUR/USD falls on Monday and reached the middle band of the Bollinger Bands. Currently, the price is moving just below the middle band of the Bollinger Bands indicating there’s a potential lower movement to the lower band. The Relative Strength Index (RSI) currently stands at 39, indicating that the EUR/USD is starting to enter the bearish moment.
Resistance: 1.1038, 1.1121
Support: 1.0915, 1.0839
XAU/USD (4 Hours)
XAU/USD Gains Momentum as Optimism Weakens US Dollar Amid Easing Inflation Signs
At the beginning of the week, XAU/USD, the gold-to-dollar exchange rate, rose higher as investor optimism led to a shift away from the US Dollar. The precious metal traded around $1,972, recovering most of its losses inspired by the European Central Bank (ECB), and further gained momentum with Wall Street’s opening as stocks maintained a positive tone from the previous week, supported by signs of easing global inflation.
Following the release of German and US inflation-related data on Friday, the Eurozone reported a decline of 0.1% MoM in July’s Harmonized Index of Consumer Prices (HICP) according to preliminary estimates, with the annual figure easing to 5.3% from the previous 5.5%. The upbeat market sentiment exerted pressure on the US Dollar, causing it to lose ground unevenly against all major rivals, with commodity-linked currencies performing the best and European counterparts performing the worst. As market participants await American employment-related figures, the focus remains on upcoming reports such as June JOLTS Job Openings, the ADP survey on private job creation, and the July Nonfarm Payrolls report (NFP) expected to show 200K new jobs created in the month.
According to technical analysis, the XAU/USD rises slightly on Monday and moves above the middle band of the Bollinger Bands. Currently, the price is slightly above the middle band, indicating that there is still potential for Gold to move even higher. The Relative Strength Index (RSI) currently stands at 50, which indicates that the XAU/USD pair is moving back to the neutral stance.
