This week I will begin with my monthly and weekly Forex forecast of the currency pairs worth watching. The first part of my forecast is based upon my research of the past 20 years of Forex prices, which show that the following methodologies have all produced profitable results:

Let us look at the relevant data of currency price changes and interest rates to date, which we compiled using a trade-weighted index of the major global currencies:

Monthly Forecast August 2022

For the month of August, I forecasted that the EUR/USD currency pair would decline in value. The result so far is shown below:

 

Monthly Forex Forecast Performance

Weekly Forecast 14^th August 2022

Last week, I forecasted that the NZD/USD currency pair would fall in value over the week, as it made a strong counter-trend price movement over the previous week.

This was a great call, as the NZD/USD fell by 4.26% over the week.

The Forex market saw a slight decrease in directional volatility last week, with 52% of all the important currency pairs or crosses moving by more than 1% in value. Directional volatility is likely to be lower over this coming week as although there are a few key news releases scheduled, we are unlikely to see any with a very strong impact on the market, possibly excepting a surprise in the forthcoming US preliminary GDP data release.

Last week was dominated by relative strength in the US Dollar, and relative weakness in the New Zealand Dollar.

 

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Key Support/Resistance Levels for Popular Pairs

I teach that trades should be entered and exited at or very close to key support and resistance levels. There are certain key support and resistance levels that can be watched on the more popular currency pairs this week.

Key Support and Resistance Levels

Let us see how trading two of these key pairs last week off key support and resistance levels could have worked out:

USD/JPY

We had expected the level at 132.65 might act as support in the USD/JPY currency pair last week, as it had acted previously as both support and resistance. Note how these “role reversal” levels can work well. The H1 chart below shows how the price rejected this level right at the start of last Monday’s New York session with a doji candlestick, marked by the up arrow signaling the timing of the bullish bounce. This is typically a great time of day to be entering trades in major Forex currency pairs. This trade has been extremely profitable, achieving a maximum positive reward to risk ratio of more than 13 to 1 so far based upon the size of the entry candlestick structure.

USD/JPY Hourly Price Chart

EUR/JPY

We had expected the level at 134.97 might act as support in the EUR/JPY currency cross last week, as it had acted previously as both support and resistance. Note how these “role reversal” levels can work well. The H1 chart below shows how the price rejected this level right at the start of last Tuesday’s Tokyo session with a bullish hammer candlestick, marked by the up arrow signaling the timing of the bullish bounce. This is typically a great time of day to be entering trades in Forex currency crosses involving the Japanese Yen. This trade has been nicely profitable, achieving a maximum positive reward to risk ratio of more than 5 to 1 so far based upon the size of the entry candlestick.

 

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It looks like we are threatening a major breakout.

The US dollar has rallied during early trading on Wednesday to reach the 50 Day EMA against its Japanese counterparts. Because of this, it looks like we are threatening a major breakout, and if we can get above the highs of the trading session, it’s very likely that the US dollar will continue to climb and go looking toward the highs yet again.

The FOMC Meeting Minutes came out during the day, and some traders thought of them as being a bit dovish. Because of this, we have seen a bit of a pullback from the highs of the day, but it’s also probably worth noting that the pullback was relatively small, so there still seems to be a certain amount of conviction. I believe that the uptrend is still very strong, and it is probably only a matter of time before we see buyers resume their efforts.

• Pullbacks at this point should be thought of as potential buying opportunities, especially near the ¥131 level.
• I think there is a lot of support near the ¥127 level as well.
• We are essentially looking at the ¥127 level as a “floor in the market”, and a “flooring the trend”, at least for the time being.

On the upside, we have the ¥140 level as a potential target, but it’s probably going to take a while to get there. The ¥140 level is a large, round, psychologically significant figure in an area that we have seen a lot of fighting at in the past. It would not surprise me at all to see the market test that area again and cause a lot of noise once it gets there.

What Do We Anticipate for USD/JPY?

I anticipate that the USD/JPY market will continue to be very noisy and erratic, following the bond markets as the Bank of Japan continues to fight higher yields. They are essentially doing the same thing as printing yen consistently, while the rest of the world is tightening monetary policy. This is why all Japanese yen-related currency pairs are moving in lockstep at the moment because this is more about Japan than anything else currently. If we see yields rise in the United States, that only adds more fuel to the fire.

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I will be paying attention to the 10 year yield, as it has been a good indicator as to where we can go next and not only gold, but other markets as well.

• Gold markets fell almost immediately in the futures market on Monday as we continue to hear a lot of noise around the US dollar and the interest rate complex.
• Keep in mind that higher interest rates will work against the value of gold, and it should probably be noted that gold has had a nice rally for a while.
• Because of this, I think it is probably only a matter of time before we see a significant turnaround, and perhaps an attempt to clear out a lot of the “weak hands.”

Technical Analysis

It’s worth noting that we are sitting at the 50-day EMA, which is an area that a lot of people will pay attention to from a technical analysis standpoint, but quite frankly also can be sliced through quite easily. If we were to break down below the bottom of the candle for the trading session on Monday, then it’s possible that we would drop down to the $1750 level. I think at this point we are more likely than not going to see volatility over everything else, so I do think that it makes sense that we drop a bit.

Pay attention to the US dollar, because it does have a negative correlation to the gold market, which has been relatively strong as of late. If we were to turn around and take out the $1815 level in the spot market, I think that kicks off a lot of short-term short covering and allows the market to go reaching the 200–day EMA. The 200-day EMA is currently at the $1845 level, so it makes for a quick easy $30.

On a break down below the $1750 level, it’s possible that gold goes looking to the $1720 level. The interest rates in the US continue to be a major driver of where you go, with the inverse correlation being so strong. The $1720 level is massive support, and if we were to give that up, things could get rather ugly in short order. In that scenario, we could see a massive flush lower as the US dollar would continue to punish almost everything else in the financial markets. With that in mind, I will be paying attention to the 10 year yield, as it has been a good indicator as to where we can go next and not only gold, but other markets as well.

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At this point, it’s almost impossible to short this market and we are so close to a major breakout it’s unreal.

• The S&P 500 Index rallied on Monday again after initially falling.
• It now looks as if we are going to do everything we can to break above the 4300 level, and that opens up the possibility of a bit of a “melt-up”.
• There’s nothing truly keep in the market back other than the 200-day EMA, an indicator that is only somewhat reliable.

S&P 500 Likely to Break Out to Upside

Keep in mind that these markets run on liquidity and not what’s going on in the economy unless of course, it’s good news. Because of this, I think that this market probably does break out to the upside and continues going much higher, mainly due to the fact that there doesn’t seem to be anything that can dissuade buyers from coming in and taking advantage of the “cheap pricing.” Keep in mind that this is about liquidity, and it’s obvious that the market believes the Federal Reserve will do whatever it tells it to, and right now is telling the Federal Reserve to be loose with its monetary policy.

The bond market also doesn’t buy the Federal Reserve being able to tighten either, and that has had its own emphasis on potential flooding of liquidity. As long as there is liquidity, stocks go higher because that’s what Wall Street’s been trained to do. The Federal Reserve has been complicit in pumping up a massive asset bubble and has raised an entire generation of traders that know nothing else but pay attention to what the bond market and liquidity is doing. Fundamentals do not matter anymore, and unfortunately, there are a lot of retail traders out there wasting their time looking at P/E ratios, expense reports, etc.

The game has changed quite drastically because most of the volume is done with high-frequency trading machines looking at mathematical patterns, not anything to do with the stock that they are trading. Quite frankly, it’s just an algorithm that gets followed. I know this sounds pessimistic, but once you understand the game you’re playing, you can begin to score some points. At this point, it’s almost impossible to short this market and we are so close to a major breakout it’s unreal. Yes, there are a lot of bearish cases to be made out there, but it’s obvious that Wall Street doesn’t care. As long as it’s going to be the case, you can either argue with Wall Street, or make money.

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Bullish View

• Set a buy-stop at 24,600 and a take-profit at 25,500.
• Add a stop-loss at 22,500.
• Timeline: 1-2 days.

Bearish View

• Set a sell-stop at 23,450 and a take-profit at 22,000.
• Add a stop-loss at 25,000.

The BTC/USD price jumped in the overnight session as the market reflected on the latest US inflation data. It crossed the important resistance at 24,000 for the first time since last week and is about 35% above the lowest level this year.

US Inflation Data

The BTC/USD price jumped sharply as investors reacted to the latest US consumer price index numbers. According to the Bureau of Labor Statistics (BLS), the country’s consumer price index declined from 1.3% in June to 0.0% in July. This decline was smaller than the median estimate of 0.2%. It then translated to a year-on-year increase of 8.5%, which was lower than the expected 8.7%.

Further data showed that the country’s core inflation dropped from 0.7% to 0.3%, which was lower than the expected 0.5%. On a YoY basis, this inflation remained unchanged at 5.9%. The two figures were still bigger than the Fed’s target of 2.0%.

Therefore, analysts believe that the Fed could start slamming its brakes on hiking interest rates since inflation has started to drop. They expect that it will hike by 0.5% in September followed by 0.25% in the final two meetings of the year.

The BTC/USD pair rose after the report because of the significantly weaker US dollar. The dollar index dropped by more than 1.25% to $104.93. At its peak this year, the index was trading at $109.30. Similarly, America’s short-term bond yields slipped, with the 10-year falling to 2.788% and the 5-year dropping to2.9%.

Meanwhile, other assets also continued their comeback. Gold soared to the highest point in months while American indices like the Dow Jones, Nasdaq 100, and the Russell 2000 rose by more than 1.50%.

BTC/USD Forecast

The four-hour chart shows that the BTC/USD pair dropped to a low of 22,724 on Wednesday. This was a notable level since it was along the ascending trendline shown in green. It then bounced back after the US published weak inflation numbers. The pair has moved above the 25-day and 50-day moving averages while the MACD has moved slightly above the neutral point.

The pair will likely have a bullish breakout in the coming days. This view will be confirmed if it manages to move above the upper side of the ascending triangle pattern at 24.400.

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By the end of the Wednesday session, we could probably have something in the realm of clarity that we can start following for a bigger move.

• Gold markets rallied a bit Tuesday as we wait for the crucial CPI numbers.
• CPI will come out on Wednesday, and it could have a major influence on what the Federal Reserve does next, as Wall Street ways to see whether or not it gets cheap or free money.

The 50-day EMA sits just below current trading, and therefore it’s potentially a short-term support level. If we break down below the 50 Day EMA, then it’s possible that we could go looking to the $1750 level. That’s an area where we had seen previous resistance, and it’s likely that could come in and offer a bit of “market memory” and make the market react to it.

If we break out above the $1815 level, then it’s possible that the market could go looking to reach the 200 Day EMA which is near the $1850 level. The 200 Day EMA of course would cause quite a bit of resistance, so breaking above that would kick off a lot of algorithmic trading. I think the only thing that you can count on now is going to be a lot of noisy behavior though, so given enough time I think that this is a market that needs to make a bigger move.

Waiting for CPI Numbers

The CPI numbers coming out hotter than anticipated will have people freaking out, running to the US dollar as the Federal Reserve will have to become much tighter and more aggressive with its monetary policy. Quite frankly, the Federal Reserve keeps telling everybody that it is going to be tighter and more aggressive, and therefore it’s a bit surprising that the market is trying to argue the point. However, this is a market that I think given enough time will either start to fall toward the low again or perhaps break above that crucial 200 Day EMA. By the end of the Wednesday session, we could probably have something in the realm of clarity that we can start following for a bigger move. I think that the real signal is probably at the end of the day on Wednesday. Between now and then, it’s going to be nothing but a lot of choppiness and sideways behavior. The market being between the 50 Day EMA and the 200 Day EMA suggests that we are getting a lot of crosscurrents at the same time.

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You need to be very cautious with your position sizing unless, of course, you are looking to build a longer-term position.

• The Ethereum market pulled back a bit on Tuesday to show signs of selling pressure.
• The $1800 level is an area that extends to the $2000 level and has been a major resistance barrier previously, as well as a major support level.
• “Market memory” comes into the picture and should continue to affect how the market moves.

Risk Appetite Suggests Positivity

Ethereum has gotten a bit of a boost over the last couple of weeks as the risk appetite has gotten better, and of course, the network is starting to get close to a major upgrade. This suggests that the market is more likely than not going to be seeing more use, but whether or not that actually happens is a different situation altogether.

Underneath, the 50-day EMA should be supported, near the $1325 level. The $1200 level underneath there is the top of the previous consolidation area, so I do think that it’s an area that a lot of people would be paying close attention to because it also would have a lot of “market memory” going forward. The market breaking down below the $1200 level opens up the possibility of a move down to the $900 level. Anything below the $900 level opens up a massive amount of selling pressure that could cause the Ethereum market to collapse down to the $400 level.

If the market were to break to the upside and continue to show bullish behavior, clearing the $200 level opens up the possibility of a big move higher, and more likely than not would kick off a longer-term uptrend. At that point, I’d be looking for Ethereum to go to the $4000 level, but I don’t think that happens very quickly.

The only thing that you can count on in this market from what I can tell is going to be volatility. Because of this, you need to be very cautious with your position sizing unless, of course, you are looking to build a longer-term position. I think that a pullback at this point in time makes quite a bit of sense and could allow traders to slowly build up a bigger position that believes in the longer-term efficacy of Ethereum, and whether or not the demand will continue to pick up for the network. Longer term, it does look very interesting, but that does not necessarily mean that you need to go “all in” at this point.

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It’s interesting that we are lining up for a fight just as we are running into a bit of significant resistance.

• The S&P 500 Index initially pulled back Friday but then turned around to show signs of bullish pressure late in the day.
• It does make sense that the market rallied on Friday, mainly due to the fact that money managers will try to mark up into the end of the month.
• This is a market that has a little further to go before it hits massive resistance, but it is worth noting that the market has been relentless.

Eyeing the 4200 Level

I do believe that we will out of momentum sooner or later, with the 4200 level above being important. It’s worth noting that the area has been resistant before, so if we get some type of exhaustion candlestick in the general vicinity, I am willing to start shorting. This makes sense, due to the fact that even though interest rates have dropped in the United States, the reality is that the Federal Reserve has not suggested that it was ready to pivot. True, they said something about being near the neutral rate, but they also suggested that there are still hikes coming.

If we do break above the 4200 level, then it’s possible that the market could go looking to the 200-day EMA. That obviously would be a very bullish turn of events, and at that point, I think the market would have just about proven its uptrend. This has been a market that has been overdone on multiple time frames. Because of this, I think at the very least we can probably count on some type of pullback, but the fundamental information out there that we have right now does not suggest that we are ready to take up to the upside.

The 4000 level underneath would probably be important as well, as it is a large, round, psychologically significant figure. After that, then we have the 3950 level which would be rather important as well. The market is most clearly bullish in the short term, and momentum is most certainly on the side of the buyers. However, it’s interesting that we are lining up for a fight just as we are running into a bit of significant resistance. Whether or not we can continue this move is a completely different question, but I do think Monday is going to be interesting to say the least.

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I believe this is a market that will continue to struggle in the face of higher interest rates, and of course, the fact that there are a lot of concerns out there when it comes to global growth in general. 

Gold markets have been relatively quiet as we awaited the Federal Reserve meeting on Wednesday. That being said, we have seen a lot of noise in the general vicinity, and now it’s a question as to whether or not we can get some type of clarity for a longer-term outlook before gold can settle everything out. After all, the Federal Reserve continues to be very tight with its monetary policy and did in fact raise interest rates by 75 basis points as anticipated.

When you look at the charts, it’s easy to see that the $1700 level has been important over the last couple of years, so the fact that we have bounced from there should not be a huge surprise. The question now is whether or not we can break it back down below it? If we do, then the gold market will be more likely than not to drop all the way down to the $1500 level over the next several months. That being said, we have some work to do before that happens. In fact, we need to break it down through the $1680 level, as the $1700 support level is basically “$20 thick.”

Rallies at this point will have to deal with the $1750 level, an area that I think is going to be a bit difficult to overcome. At this point, even if we broke above there, I think it’s likely that we would see this market struggle to go much higher, with the $1800 level above being a major barrier that will be very difficult to get past. We have the large, round, psychological significance of the number, we have the major selling area there as well, as well as the previous trendline and the 50 Day EMA. With everything said, I believe this is a market that will continue to struggle in the face of higher interest rates, and of course, the fact that there are a lot of concerns out there when it comes to global growth in general. The US dollar has been like a wrecking ball over the last several months, and I think that will continue to be the main theme here, as this market will continue to pay close attention to the headwinds that the greenback causes this market.

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The euro is in freefall as we are seeing so much in the way of negativity globally, and when you have problems with energy, that’s not a good look for the continent.

The euro got absolutely clobbered on Tuesday, as we have broken through the 1.04 level quite handily. Furthermore, the market looks as if it has further to go, looking at the 1.02 level as the next target. When the market is more likely than not going to continue to see plenty of selling pressure, I do not like chasing the trade all the way down here. Instead, it becomes more of a “fade the rally” type of market, like anything else that has itself quoted in US dollars.

The 1.04 level above is a large figure that a lot of people would pay close attention to, especially as it had offered support a couple of times in the past. “Market memory” comes into the picture at that level, and I think there will be plenty of sellers. If we were to break above the 1.04 level, then it’s possible that we could go to the 1.06 level, where we would meet the 50-day EMA. The 50 Day EMA has broken lower for some time; therefore, I think it creates a significant amount of dynamic resistance.

Alternatively, we could just turn around and break below the 1.02 level. If we do, then the euro could drop down to the parity level, which is what my target is for the end of the summer. We are getting there much more quickly, so I think that we could even be talking about this by the end of the week. At this point, the euro is in freefall as we are seeing so much in the way of negativity globally, and when you have problems with energy, that’s not a good look for the continent.

It is not until we break above the 1.06 level that I would consider it a rally worth looking at. Even then, I would not be convinced that the market turned around until we broke above the 1.08 level. That would take a Herculean effort, so I would not hold my breath for that to happen anytime soon, so rallies are more likely than not going to offer nice selling opportunities to pick up “cheap US dollars.” The downtrend is fully ensconced, and quite frankly does not look like it’s changing anytime soon.