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Market News Posted by Team Topstep July 29, 2021

FX Market’s Midyear Pulse Check

Forex Trading Screen

Earlier this month (July 2021), we examined ways traders might reflect at the midpoint of the year. Today, we will look at how particular markets are behaving as we begin to stare down the second half of 2021 with an FX midyear pulse check. 

Things are heating up, and it’s not just the summer air if you live in the northern continents. The primary thing attracting global headlines is the SARS-CoV-2 Delta variant, creating much uncertainty for the remainder of this year. I want to note that my interest is in preparing for whatever is around the corner. I’m not attempting to present a doomsday scenario, and I hope the Delta variant will come under control. However, the last 18 months have taught us to prepare for anything. 

While this midyear report focuses on the currency markets, I will still assess the circumstances on some commodity markets that are highly correlated to a specific currency. In addition, gold, which is something of a currency of its own, will also be highlighted. 

My approach is to blend a combination of factors to give what I believe to be the best picture. This methodology includes a look at fundamentals, technicals, seasonal factors, and, where necessary, positions accounted for by the CFTC’s Commitment of Traders report. 

The U.S. Dollar

The first item that I will look at is the U.S. dollar in general. The fundamentals are a mixed picture. However, the technicals and seasonality may offer the most helpful assessment. Historically speaking, the USD tends to bottom in May, trade higher in the summer, and sell off late summer. 

US Dollar Chart

As you may detect from the chart, the USD index has rallied since May. However, the market is now reaching resistance from the 2021 high printed in March and a longer confluence of resistance from the last 52 weeks. Therefore, based on an extended rally, this technical picture, and the seasonal patterns, I expect the USD to show weakness in the coming weeks.

However, I must identify a caveat, that being the COVID19 Delta variant situation. The USD did rally for two to three weeks when the U.S. was experiencing the initial outbreaks in 2020. However, the trajectory in the weeks before the March 2020 outbreak and following that short-lived rally was lower. 

If there is selling momentum on the USD, I expect many dollar pairs to make a new low for the year in the upcoming months. 

Correlating Markets

If you are trading the forex markets and looking to sell the USD, you will need a currency with a bullish view. The British pound (GBP) has been one of the firmest currencies. However, the GBP will likely become very weak if the Delta variant creates a severe market response. Furthermore, seasonally speaking, the pound tends to top out in early August, then trade sideways to lower for the remainder of the year. 

Meanwhile, we can expect the Japanese yen (JPY) to be firm should there be a considerable uprise in global COVID19 concerns. Moreover, the JPY has attracted many speculative shorts in recent months, which could create fuel for an attractive rally if prompted to cover. 

Gold serves as another type of currency that traders and investors often view as a safe haven. After printing a high of just under $2,100 last August, the market has ranged lower. However, all things considered, the price action has been healthy, reflecting a reasonable pullback, retracing less than 50% of its big move off the 2018 lows. 

Gold Futures Chart

While I think at this point, under normal circumstances, the ceiling for gold is limited. However, should the Delta variant ignite significant global health and economic concerns, I would look for the market to test the $2,100 level. Meanwhile, as long as the market holds the 50% retracement of $1,628, then I’m looking to buy pullbacks in this market. 

Crude Oil

The next market I will examine is crude oil which has enjoyed a lovely 15-month rally off the COVID19 lows until it began to modestly retrace two weeks ago. If the Delta variant happens to cause massive shutdowns again, then the path of least resistance in the crude oil market will be selling. Regardless, oil fundamentals have already been creating suspicion with prices above $70 a barrel. Furthermore, the seasonal picture indicates that oil makes a high in July and then rolls over into the year. 

Crude Oil Chart

The weekly chart also adds to the suspect prices above $70, which served as resistance when last me during the autumn of 2018. Crude oil is a market where speculative money has been incredibly long for a while. If there is any catalyst for a downward move, there should be volume to create momentum to the downside. I would look at $50-$56 as support. 

The correlation between crude oil and the Canadian dollar (CAD) is ongoing as the CAD represents what is known as a commodity currency, with Canada’s primary export being oil. Given the toppy behavior in oil, one would also expect the CAD to be weak, giving a boost to USD/CAD prices.

USD-CAD Chart

While I tend to overall expect a weaker USD in forthcoming weeks, where I will look for bullish dollar entries will be on this USD/CAD pair, especially in the 38.2%, 50%, and 61.8% retracement areas of this recent rally. Below the 1.2300 area, I prefer to lay aside my buy-the-dips bias on this market. 

Knowing What Affects Momentum

In conclusion, I realize that most readers of this blog are day traders and less interested in some of the macro pictures that I have presented here. However, even day traders can benefit from being aware of the broader functions of their traded markets. 

It is helpful to know the long-term support and resistance areas and the catalysts that create momentum and trend. I’ve seen countless day traders fight the path of less resistance rather than trading with the proverbial grain. This is true for any market, but especially that of currencies and commodities. 

Here are my best wishes for a profitable second half of 2021. Trade well, everyone!