Get the Forex Forecast using fundamentals, sentiment, and technical positions analyses for major pairs for the week of January 3, 2021 here.
U.S. Dollar Index
The weekly price chart below shows the U.S. Dollar Index printed a bearish candlestick last week, after previously rejecting the resistance level identified at 12257 two weeks ago. Note how this key resistance level has held again – in fact it held just after the FOMC release some weeks ago when it was tested, which is possibly a bearish sign. While this continued decline is not enough to invalidate the long-term trend (the price is well above its levels from 3 and 6 months ago), it is very notable that there is clearly strong resistance here, which is having impact. This suggests that despite the long-term bullish trend, we may now have experienced a major bearish reversal. However, it is also worth noting that the price is now very close to a major support level at 12150.
Overall, I would not look towards the USD as a key driver for any trades over the coming week. For a while, and possible for the entire coming week, there will likely be momentum against the US Dollar, although the Japanese Yen remains considerably weaker.
USD/JPY
The USD/JPY currency pair made its highest weekly close in 5 years for the second week running, printing a healthy sized bullish candlestick which closed near the top of its range. These are clearly bullish signs that we are likely to see a further rise over the coming days and weeks. However, it should be noted that there were recently several higher daily closes all the way up to the very key resistance level at 115.25. Although the rise in USD/JPY is supported by the improved risk sentiment we are seeing in markets since data began to show omicron as relatively mild, this currency pair is still prone to a sudden selloff below 115.25, so I do not want to go long here until we see a daily (New York) close above 115.25.
S&P 500 Index
The S&P 500 stock market index made its highest ever weekly close but printed only a bullish candlestick which did not close near the top of its range. There are bullish signs remaining, but it will be worthwhile to be cautious and not buy until we see a daily close above 4800 with a firmly bullish daily candlestick closing.
EUR/USD
The euro initially fell during the previous week but then ended up closing at the very top of the range that we have been in. This is a little bit of a “heads up” about the thinking of traders as we step into the new year. There is a very good chance that we will break the top of the range for the week and continue to rally a bit, and I am seeing a bit of US dollar weakness across the board. With that in mind, the initial target will be the 1.15 handle. Keep in mind that Friday is non-farm payroll, so it might be a slightly choppy week for the first few days.
AUD/USD
The Australian dollar rallied last week to continue its grind higher. The fact that we closed at the very top of the weekly candlestick does suggest that perhaps we will try to continue, but we also noted that several of the candlesticks for the week ended up forming long wicks to the upside. It is because of this that I believe that even if we do have a positive week here, the upside is somewhat limited when it comes to the Aussie dollar itself. To the downside, I would look at the 0.71 level as a very significant support level.
EUR/JPY
The euro has had a very strong week against the Japanese yen, closing near the ¥131 level. It now appears that the Japanese yen itself is in trouble so this could continue going forward, at least into this week. At this point, I would not be surprised at all to see this market make a serious attempt to get to the ¥133 level, especially if we end up having more of a “risk on week”, which I do think will probably be the case as traders put money back to work after the holidays.
AUD/CAD
The Australian dollar initially tried to rally against Canadian dollar this past week, but as you can see, we continue to see a lot of selling pressure near the 0.93 handle. We have been grinding lower for a while and it now looks like we are getting ready to rollover to continue the overall downtrend. This does make a certain amount of sense, considering just how strong crude oil suddenly is. At this point, I anticipate that this market will revisit the 0.90 level.
Bottom Line
I see the best opportunities in the financial markets this week as likely to be long of the S&P 500 Index following a daily close above 4800, and the USD/JPY currency pair following a daily (New York) close above 115.25.
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