As US inflation data finally starts to show a major reduction, the Forex market has had a very strong reversal over the past week, with the US Dollar sharply falling and stock markets surging strongly.
USD/JPY, EUR/USD, GBP/USD, XAU/USD
The stronger-than-expected decline in US inflation statistics from last week, which saw the annualized CPI drop from 8.2% to 7.7% while a decline to only 8.0% or 7.9% was widely anticipated, is currently dominating the market.
This is the important economic data that the markets have been paying attention to recently since historically high inflation levels have compelled central banks to raise interest rates significantly, which has driven up the US dollar and driven down stock markets.
Analysts have been anticipating this move’s end, which should occur when inflation in big economies actually starts to decline, demonstrating that the tighter monetary policies implemented by central banks appear to be effective.
This, in turn, generates hope that central banks, particularly the Fed in the United States, can start to loosen up, which boosts stock markets and deflates the recent sharp spike in the US Dollar caused by rates.
The Dollar Last Week
The Forex market had an extremely powerful move over the past several days, with the US Dollar sharply declining and other currencies sharply gaining against it. While the EUR/USD currency pair increased by barely more than 4%, the USD/JPY currency pair fell by more than 5%.
The S&P 500 Index increased by more than 6.5% throughout the week, significantly boosting stocks and commodities as well. However, several institutions warn that these increases are very exuberant, suggesting that they might only last for a while.
In addition, they are technically extremely firmly against the trend.
Data on the UK’s GDP were recently released, and they revealed a worse-than-anticipated month-over-month fall of 0.6% (only a decline of 0.4% had been predicted). However, this has not significantly impacted the British Pound, which is performing as well as the Euro.
Last week also, the Japanese Yen had the biggest strength on the Forex market, much to the Bank of Japan’s final relief after striving to counteract recent weeks’ and months’ extreme Yen depreciation. The US Dollar was unquestionably the weakest currency.
US Dollar Index (DXY)
On Thursday, before the Friday holiday, the US Dollar Index (DXY) broke sharply on better-than-expected CPI data, and it lost significant support as a result. It is likely that the negative trend that ended last week will continue at least into the first few days of this week.
The U.S. Dollar Index produced a very potent bearish candle that ended exactly at its low. The US Dollar experienced its biggest weekly decline in value in a number of years. The price easily breached two previous support levels and will likely act as resistance going forward.
Since we are finally witnessing inflation rates that are materially declining, the long-term bullish trend in the US dollar is seriously threatened and may even be gone. This suggests the Fed won’t be under as much pressure to make further significant rate hikes.
US Dollar (DXY) Daily Chart
USD/JPY
The USD/JPY currency pair printed an extraordinarily huge bearish candlestick last week, easily breaking through numerous previous support levels, and it closed quite close to the range low.
The Bank of Japan had just started intervening to bring the price down, but this currency pair had become overextended against its wishes. All of these elements played a role in the recently observed exceptionally steep price decline.
Given the very strong bearish momentum present, it appears likely that within the next week, the price will reach the closest support level at ¥137.04.
GBP/USD
Late on Friday, the GBPUSD touched 1.1855, its highest level since August 26. It also registered significant weekly gains. The price of the pair, which is in the midst of a downward correction, recently fell by 0.7% on the day at about 1.1750.
GBP/USD Daily Chart
EUR/USD
The US Dollar’s long-term, extremely positive trend is likely finished, and the Euro is currently displaying strong short-term strength.
Even if the price had been increasing from the previous long-term long before last week, the US Dollar’s sharp decline as a result of the US inflation print was felt quite strongly in this currency pair.
Although the short-term bullish momentum appears to be quite strong, bulls should be aware that even powerful trends can have retracements in this currency pair. Given that the price ended last week around what appears to be a significant resistance level at around $1.0355, additional price growth in the near term may not be expected.
XAU/USD
Gold has historically had a favorable connection with the US stock market, despite its conventional perception as a safe-haven asset. As a result, it is not shocking that Gold is rising along with stocks at the moment.
There is a strong short-term positive momentum, and what makes the price of gold particularly intriguing for traders in the coming days is that, in contrast to most important Forex pairs. The price still has some upward movement before reaching a significant area of resistance.
The price will probably increase over the next few days to at least reach the closest resistance level at $1809.
Upcoming Data
Although there are a number of significant data releases due for this week, none of them is anticipated to have the same impact as the US inflation data from last week. Therefore, the markets are likely to experience less volatility this week. The upcoming releases include:
- British CPI (inflation) data
- Canadian CPI (inflation) data
- US PPI data
- US Retail Sales data
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