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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The West Texas Intermediate Crude Oil market has fallen during trading on Thursday to break through a trendline. That being said, there is also a much more important trend line underneath here, so I think we have a huge fight on our hands. Crude oil is a market that I don’t like putting a lot of money into right now, because there are so many different things pushing it around at the moment.

One thing that is worth paying attention to would be the Strategic Petroleum Reserve in the United States dropping down to the lowest level since 1986. This does suggest that sooner or later the Americans will start buying oil to refill that deficit, so that could be a longer term bullish driver. However, at the same time you have to wonder whether or not the demand will continue to stay strong as there has been so much in the way of destruction of the economy. Commodities across the board have been getting hammered as of late, so it is worth noting that market participants have been selling copper, natural gas, and even agricultural futures. This suggests that the market is pricing in a rather steep recession.

A recession does not typically help the price of oil. The Atlanta Federal Reserve suggests that the Q2 numbers coming out of the United States are negative, and if that were to be realized, it would be confirmation of a recession in the US.

That being said, China is still in the midst of trying to reopen, although its silly Covid policy seems to be keeping that from being a full-time issue. That does away with the market, but I think given enough time we will see crude oil attempt to make a recovery. If we were to break down below the $100 level, that could change a lot of things, perhaps in the market much lower. The $115 level above seems to be significant resistance, so if we are between those two levels, I suggest that it could be very choppy, and therefore you would need to be very cautious with your position sizing. At this point, it’s probably easier just to ignore this market for the time being, as there is so much noise out there.

I do not have a lot of faith in rallies at this point, and I do think that it is probably only a matter of time before we break down quite drastically.

The S&P 500 rallied a bit on Wednesday as the Federal Reserve’s meeting came into focus. At this point, we have seen a little bit of a giveback, which does make sense considering that the Federal Reserve looks to be very tight going forward. Ultimately, this is a market that still finds a lot of trouble, and I think it will eventually break down.

Any rally at this point looks like it’s going to find trouble, especially near the 3900 level, maybe even the 4000 level. If that were to be the case, I look at a rally as an opportunity to get short yet again. Ultimately, the market will continue to see downward pressure, but if we were to break down below the 3700 level, then it’s likely that we will go down to the 3600 level. After that, the market more likely than not will go looking to the 3500 level.

The 50-day EMA has broken down to the 4100 level and is floating lower. I think the 50-day EMA wound up in dynamic resistance, so you will have to pay close attention to it. I do not think we will get above there, but if we did it has to be one of the situations where things could get noisy and go much higher. That could be a bit of a difficult move to make, but if we were to break above there it’s likely that we would see a lot of short-covering and that could cause this market to squeeze much higher. Having said that, after the market reaction during the day on Wednesday, I do not have a lot of faith in rallies at this point, and I do think that it is probably only a matter of time before we break down quite drastically.

The next major shoe to fall is going to be revisions to earnings coming from major corporations in the United States, something that has probably not been completely priced in. In other words, there is a good shot that we will see even more trouble down the road. The market continues to be very rocky, but we could get a little bit of a bounce that opens up the possibility of taking advantage of the bigger trend.

Looking at this chart, it is not till we break above the €14,250 level that I would consider going long.

The DAX rallied a bit on Wednesday as we bounced from the €13,250 level. That being said, the market is still very much in a negative mood, and it does make sense that we have not been able to hang on to all of the gains for the day. At this point, it looks as if we are going to try to recover some of the losses, but the vicious selloff that we had seen during the previous several sessions does suggest that there is still a lot of negativity out there.

The ECB had an emergency meeting during the trading session but did not announce anything important, and I believe there is probably a little bit of disappointment getting ready to be priced into the market. The DAX is the gateway to the rest of the European Union, meaning that money comes into Germany much quicker than it does in many of the other economies. The DAX is a major beneficiary of this, but at this point in time, it looks as if the market is trying to do everything it can to figure out where we are going to go next. Ultimately, the €13,250 level is an area that you need to pay close attention to. It has been important more than once, so if we were to break down below there, I think it opens up a selling opportunity down to the €13,000 level, and then perhaps even down to the €12,500 level, where we had bounced from previously.

On the upside, the €13,750 level is an area where we could see a little bit of noise, followed by the €14,000 level, which is rapidly being approached by the 50-day EMA. In other words, I believe this is only a short-term rally, and that sellers will reenter the market rather quickly. In fact, when you look at the 50-day EMA and the 200-day EMA indicators, it looks like we are in a very negative trend, and we should continue to see quite a bit of momentum. It would not surprise me at all to see a couple of days to the upside, followed by fresh selling yet again. Looking at this chart, it is not till we break above the €14,250 level that I would consider going long.

This is a market that I think is going to test the lows, and if we can break down below that area, we may even go as low as 1.07 over the next several weeks.

The euro fell again on Tuesday as we have broken through the 1.0950 level. This is an area that has been minor support previously, so it is not a huge surprise at all to see that there was a bit of follow-through once we did break through it. By doing so, the market looks as if it is ready to challenge the 1.09 level, and then the 1.0850 level given enough time.

Keep in mind that the 1.0850 level has been supported in the past, which we bounced from rather rapidly. That does not necessarily mean that it will hold like a brick wall, just that the market obviously has a lot to contend with in that general vicinity. Overall, this is a market that will continue to be very noisy, but it certainly has a lot of negativity attached to it as the Federal Reserve continues to look ready to threaten with higher interest rates, and of course, the bond market has already beat the Federal Reserve to that punch. Interest rates in America continue to rise rapidly, and that continues to make owning US dollar-denominated debt much more interesting than it is euro-denominated.

We are closing towards the bottom of the candlestick, which typically means there is going to be some follow-through. I get this even more credence due to the fact that we are in a downtrend and have been for quite some time. The fact that we pulled back to the 50 Day EMA and then broke down is also something that I would pay attention to, especially as the area between the 1.11 and the 1.12 levels above has been so difficult as far as resistance is concerned more than once.

This is a market that I think is going to test the lows, and if we can break down below that area, we may even go as low as 1.07 over the next several weeks. There are a lot of concerns out there when it comes to the European Union as far as inflation and a lack of growth are concerned, especially as energy is simply a major issue. If there is a lack of energy, it all but guarantees that we are going to have a recession in that part of the world.