Market Analysis

The Week Ahead 23Mar – 27Mar: Continued Volatility is the New Norm

Success and failure in the Forex market is determined by which currency pairs you choose to trade, and not exactly by the method you use in your trading methodology. Needless to say, nowadays the price movements are directed mostly by the news flow of the Pandemic, and that is the dominant factor to consider in trading any market today.

Big Picture 23rd March 2020

Previously, my call on shorting the GBP/USD currency pair and short of the DAX stock market index turned out quite well. Over the week, GBP/USD fell in value by 5.04% and the DAX rose by 2.30%, so the average win here was 1.37%.

Last week’s Forex market again saw the strongest rise in the relative value of the U.S. Dollar, and the strongest fall in the relative value of the Australian Dollar.

Fundamental Analysis & Market Sentiment

The current fear many people have of this current crisis is overblown. Yes, this is kind of crisis comes once every 10 years, but evidence has shown us that the majority of the public that are infected are doing relatively well and have recovered somewhat.

In time such as these, it is extremely difficult to make very short-term market forecasts, as the crisis can change focus day by day, strongly affecting sentiment and market movements. However, medium-term forecasts are easier to make as we are seeing very strong momentum in price movements.

We have seen the epicenter of the global pandemic move into Europe, with Italy, Spain, Germany and France severely affected, and several countries now imposing measures of semi-lockdown.

Almost all stock markets are now in technical bear markets (decline of more than 20% from peak). However, short selling has been banned in France, Spain and Italy which may provide a floor in these markets, at least temporarily. The major U.S. stock market indices, the S&P 500 and the Dow Jones Industrial Average, still look very weak. However, the U.S. political system may be close to approving a $1 trillion stimulus package which might stop the bleeding when approved.

It is clear that this crisis will enforce severe economic restrictions in all affected countries which will need to last for several weeks or even months. The only given is that stock markets and GDP generally will take severe hits, with Goldman Sachs now forecasting a 24% drop in U.S. GDP. We have already seen emergency rate cuts in several countries and there may be even more ahead. The stock market crash we are seeing is comparable to 2008 and even 1929 so far.

It seems clear that we will see a continued level of high market volatility. Prices are likely to depend upon how the U.S.A. and European nations cope with the spread of the virus, and whether there are any signs of successful containment as we seem to have seen in China, South Korea, Singapore, and Hong Kong.

S&P 500 Index

The major U.S. stock market index – the biggest market index in the world – again fell sharply and ended at its lowest weekly close in three years. It is down by more than 32% from its all-time high made just five weeks ago. We may see a bullish bounce when the U.S. administration and congress finally agree an estimated $1 trillion stimulus and bailout package, but the worsening, Great Depression-like situation regarding demand and output means that any bullish retracements will be likely to be good selling opportunities over the coming week.

WTI Crude Oil

WTI Crude Oil again fell sharply and ended at its lowest weekly close in 18 years. We may see a bullish bounce when the U.S. administration and congress finally agree an estimated $1 trillion stimulus and bailout package, but the worsening, Great Depression-like situation regarding demand and output globally, and not just in the U.S., means that any bullish retracements will be likely to be good selling opportunities over the coming week.

U.S. Dollar Index

The weekly price chart below shows last week printed a very large bullish candlestick which closed not far from the high of its range. It made a new 17-year high price. These are very bullish signs. It seems that the current global crisis is producing a rush into the USD as a safe haven. Overall, it seems likely that the U.S. Dollar will rise further over the coming week.