The West Texas Intermediate Crude Oil market has broken out of a falling wedge on Tuesday to show signs of life again. By doing so, the market looks very likely to continue rallying, especially considering that we are closing at the very top of the candlestick. However, the real question at this point is whether or not this has any chance of taking off to the upside for an extended move.

Pay attention to global demand

There are some things to pay attention to at the moment that has nothing to do with the charts. The first thing of course is whether or not there is going to be global demand. If the global economy is in fact slowing down, it’s difficult to imagine a scenario where demand for oil is going to pick up. After all, oil is the lifeblood of an economy, and as a result, a slowing economy will demand a lot less of it.

Another thing to think about is whether or not the Iranians are going to sign the nuclear deal because that will throw another 1 million barrels into the market on a daily basis. Furthermore, we also have to pay close attention to Saudi Arabia, which is now talking about cutting back on output, which could have prices could go higher. In other words, there’s a lot of uncertainty out there and therefore I think the only thing you can probably count on is a lot of volatility.

Looking at this chart, from a technical analysis standpoint, the falling wedge suggests that we could go to roughly $101, but we also have the 200 Day EMA sitting just above, and also have the 50 Day EMA dropping below the $100 level and racing toward that 200 Day EMA. That should be quite a bit of technical resistance as well.

• Focus on short-term charts, recognizing that there might be a short-term relief rally.
• There are a lot of issues out there that you need to pay close attention to, so therefore you need to be very cautious with your position sizing.
• Furthermore, pay attention to the US dollar, because if it starts to strengthen that can also work against the value of commodities such as crude oil which of course is priced in that same currency.

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Price has room to fall to $1.1958.

My previous GBP/USD signal last Tuesday could have produced a profitable short trade from the bearish rejection of the resistance level which I had identified at $1.2130, which capped the day’s high price right to the pip.

Today’s GBP/USD Signals

Risk 0.75%.

Trades may only be entered between 8am and 5pm London time Tuesday.

• Long entry following a bullish price action reversal on the H1 time frame immediately upon the next touch of $1.1958 or $1.1926.
• Put the stop loss 1 pip below the local swing low.
• Adjust the stop loss to break even once the trade is 25 pips in profit.
• Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to run.

Short Trade Ideas

• Short entry following a bearish price action reversal on the H1 time frame immediately upon the next touch of $1.2100 or $1.2170.
• Put the stop loss 1 pip above the local swing high.
• Adjust the stop loss to break even once the trade is 25 pips in profit.
• Take off 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to run.

The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.

GBP/USD Analysis

I wrote in my last forecast on 9^th August that we had new lower resistance at the very clearly defined level of $1.2130, which was somewhat confluent with the upper trend line of the price channel.

I thought a short trade from a bearish reversal at that level would likely be the best set up in this currency pair, and that was a good and accurate call.

The price rose in the later section of last week, but we have seen the US Dollar make a recovery so far again this week, making gains against the British Pound yesterday. This downwards price movement looks most likely to continue, as we see a bearish technical situation with the price selling off within descending bearish wedge chart patterns. Even more significantly, there are no key horizontal support levels until $1.1958, so the price has plenty of room to fall further. However, it is possible that the big round number at $1.2000 could be supportive if reached.

The British Pound is relatively weak as the UK economy is widely seen as having a poor outlook, with the Bank of England forecasting peak inflation later this year above 13%, and a recession lasting five quarters.

I would not pay much attention to the trend lines shown in the price chart below, but a bearish reversal from $1.2100 if we get a retracement later could be a good short trade opportunity. Scalpers might find short trades on retracements below that level, as long as the price is above or has cleared $1.2000.

There is nothing of high importance due today regarding either the GBP or the USD.

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There is a likelihood that the pair will have a pullback in the next few days.

Bearish View

• Sell the EUR/USD pair and set a take-profit at 1.0450.
• Add a stop-loss at 1.065.
• Timeline: 1-3 days.

Bullish View

• Set a buy-stop at 1.0600 and a take-profit at 1.0670.
• Add a stop-loss at 1.0525.

The EUR/USD pair tilted upwards as the Federal Reserve testified before Congress. The pair rose to a high of 1.0610, which was the highest point since Friday last week. It has jumped by more than 2% from its lowest point this week.

Jerome Powell on Fed Actions

EUR/USD and American stocks jumped as Jerome Powell testified before a Senate committee. At the same time, bond yields dropped for the second day straight, with the 10-year and 30-year falling to 3.14% and 3.2%, respectively.

In his statement, Powell said that the Fed will continue hiking interest rates until there is evidence that inflation was falling towards its 2% target. At the same time, he lamented that the labor market was extremely hot and that tightening could lead to a recession.

Analysts believe that a recession is inevitable. A poll by the Wall Street Journal showed that the possibility of a recession was 44%. Most of the economists polled cited the rising consumer inflation, low unemployment rate, and the ongoing supply chain challenges.

Still, there are some positives. The price of crude oil has slumped from $124 to less than $110. Natural gas prices have also retreated while the price of some food products have continued falling. Therefore, there is a likelihood that inflation has reached its peak.

The next key driver for the EUR/USD pair will be the testimony by Jerome Powell. Still, historically, the second day of Fed chair’s testimony does not have a major impact on currencies and stocks.

Meanwhile, Markit, a company owned by S&P Global will publish the latest flash manufacturing and services PMI numbers. Analysts expect the data to show that business activity in Europe and the US weakened slightly as inflation surged.

EUR/USD Forecast

The EUR/USD pair continued rising after the latest statement by Jerome Powell. On the four-hour chart, the pair has formed an ascending channel that is shown in purple. It is now along the upper side of this channel. At the same time, the pair has formed an inverted cup and handle pattern. The current rebound is part of the handle pattern.

Therefore, there is a likelihood that the pair will have a pullback in the next few days. If this happens, the next key level to watch will be the lower side of the cup at 1.0365.

Short-term rallies will continue to offer selling opportunities, and therefore look for signs of exhaustion to jump upon

The Euro has fallen again during the trading session on Monday to reach near the 1.04 level. The area has previously been supported and is an area where we have seen a significant bounce from there. I think at this point in time it’s only a matter of finding more sellers so that we can break down below the recent low. If and when we do, it’s likely that we go looking to reach the 1.03 level, and then perhaps the 1.00 level over the longer term.

Short-term rallies will continue to offer selling opportunities, and therefore I will be looking for signs of exhaustion to jump upon. If and when that happens, I think it gives us plenty of opportunities to take advantage of “cheap US dollars.” The market has been in a downtrend for quite some time, and I don’t see anything changing as the 10-year note has seen yields rise above the 3.35% level. This is a huge level, and it suggests that the US dollar will continue to find plenty of buyers, and therefore I think it’s a situation where we can have plenty of opportunities to take advantage of a one-way trade.

If we were to turn around and take out the upside, it would have to go as high as 1.09 in order to show a complete reversal of attitude. The only way that I see this happening is if for some reason the Federal Reserve steps away from its platform of fighting inflation. I just have no interest in seeing this market as a buying opportunity, and I don’t think that the Federal Reserve has any opportunity to change its stance, because inflation is much hotter than anticipated. In other words, it’s starting to get out of control, and then we have a scenario where we could see a significant meltdown.

That being said, maybe we have a little bit of a bounce ahead of us, but that is going to be a short-term bounce at best, and therefore we should continue to see plenty of negativity going forward. You should keep an eye on the 10-year note as it has a huge negative correlation to what happens in this pair. That will more likely than not continue to be the case, and therefore one chart will lead the other.

As long as the Federal Reserve has to remain tight, the US dollar will continue to appreciate.

The euro fell on Friday as the US dollar continues to act as a wrecking ball against almost everything. The interest rates in America came out much hotter than anticipated, so it does make quite a bit of sense that the US dollar continues to strengthen, as the Federal Reserve is likely to see a reason to tighten quite significantly. Ultimately, this pair has much further to go to the downside, and the trend is very much intact.

The 50-day EMA has offered significant resistance over the last week or so, and now it looks like we are going to continue to drop down to the 1.04 level. Ultimately, anytime we rally at this point I think it will be looked at with suspicion, as we could see a lot of negativity. I think you should look for rallies as an opportunity to pick up “cheap US dollars”, as the euro is absolutely miserable at this point. In fact, the ECB tried to talk up interest rates on Thursday, which boosted the euro for about an hour.

By the time the market digested all of the information coming from Christine Lagarde, traders have decided that the ECB is behind the curve and is nowhere near catching up. Because of this, I think you are in a situation where you will see plenty of “sell the rally” type of attitude. In fact, I think that will continue to be the case through the rest of the summer, if not longer.

The 1.04 level will be the target eventually, and we may even get there rather quickly. If we break down below there, then it’s likely that we could go to the 1.02 level, possibly even down to parity which could be hit by the time we get to the end of summer. As for buying, I have no interest in doing so, but if we did break above the 1.09 level, I would have to reconsider the entirety of the trend. Above there, we have an opportunity to get to the 200-day EMA, but that seems nothing short of a dream scenario at this point. As long as the Federal Reserve has to remain tight, the US dollar will continue to appreciate. Pay attention to the bond market, as the yield differential will lead the way as well.

I’m perfectly comfortable holding a short Euro position.

The Euro has broken down significantly during the trading session on Thursday as we have broken through the bottom of the rising wedge, showing signs of exhaustion. The 50 Day EMA is an indicator that a lot of people pay attention to and has offered quite a bit of dynamic resistance. The fact that we are closing at the bottom of the candlestick is also a sign that we could get a little bit of follow-through, so I do think that it is more likely than not to have quite a bit of a continuation.

If we break down through all of this, then we could go to a low visible 1.04 level, which was the targeted level from the rising wedge. The 1.04 level then would offer support as we had bounced from there previously. If we break it down below the 1.04 level, then it’s likely that the Euro will follow part. Ultimately, I think we could go to parity, especially considering that the European Union is in serious trouble. Initially, the ECB sounded somewhat hawkish, but by the time we got through the press conference, the Euro started to fall. Ultimately, the market has shown quite a bit of negativity, showing that the ECB is not likely to be able to tighten significantly, despite the fact that they have said that they would.

The size of the candlestick is rather negative, and it does suggest that there will be follow-through. Because of this, I’m perfectly comfortable holding a short Euro position. I do think that eventually, we get a major breakdown, but in the short term it’s likely that we continue to see a lot of noisy behavior, and therefore I think volatility. I would expect a lot of volatility near the announcement, and then we should see a massive reaction.

If we were to turn around a break above the 1.08 level, we still need to break above the 1.09 level to finally turn things around. If we can break above the 1.09 level, then it’s likely that we could make a move all the way to the 1.12 level and threaten a complete reversal of the trend. That doesn’t seem to be very likely to happen, considering that we have been in such a major downtrend for quite some time.

Because of the wedge pattern, the pair will likely retest the support at 1.0640.

Bearish View

• Sell the EUR/USD pair and set a take-profit at 1.0640.
• Add a stop-loss at 1.0775.
• Timeline: 1-2 days.

Bullish View

• Set a buy-stop at 1.0755 and a take-profit at 1.0800.
• Add a stop-loss at 1.0700.

The EUR/USD pair declined slightly as the outlook of the European economic outlook worsened. It dropped to a low of 1.0676, which was the lowest level since May 14th. It is still about 1% below the highest level in May.

EU Economic Outlook

The European Union’s economic outlook worsened on Tuesday after the bloc unveiled measures to gradually phase out Russian oil imports. The bloc’s countries will still receive Russian oil that flows using pipelines.

Perhaps, the most important restrictions were on oil shipping insurance since European companies have a strong market share in the industry. The bloc will ban its companies from insuring Russian cargo.

These announcements came on the same day that European countries published strong consumer inflation data. According to Eurostat, the bloc’s inflation surged to the highest level recorded. It blamed this trend to the soaring energy and food costs.

Therefore, the soaring inflation will put more pressure on the European Central Bank (ECB) as it considers rate hikes. Most economists expect the bank will hike interest rates by 0.25% in the July meeting and then exit negative rates in September.

The EUR/USD pair is also reacting to the relatively positive data from the United States. On Tuesday, data showed that home prices surged to a record level in March. The Case-Schiller house price index rose by 20% year-over-year in March. This signals that the housing market is still hot although signs of weakness have emerged.

Meanwhile, data by the Conference Board revealed that consumer confidence declined from 108.6 in April to 106.4 in May. This decline was better than the median estimate of 103.9. Focus now shifts to the upcoming jobs numbers that will come out in the next three days.

The US will release the JOLTs vacancies numbers on Wednesday followed by initial jobless claims and NFP on Thursday and Friday, respectively.

EUR/USD Forecast

The three-hour chart shows that the EUR/USD pair formed a rising wedge pattern that is shown in black. In price action analysis, this pattern is usually a bearish sign, which explains why it made a bearish breakout on Tuesday. The pair is still above the important support level at 1.0640, which was the highest point on May 5th.

The EUR/USD pair remains above the 50-period moving average. Therefore, because of the wedge pattern, the pair will likely retest the support at 1.0640.