Last week, the financial markets made a dramatic U-turn, as many key global stock indexes recorded substantial gains. Despite underlying concerns, the looming issue of US debt ceiling seems on track to be resolved, thus avoiding a default. US Treasury Secretary Janet Yellen’s explicit warnings appear to have had the intended effect.
Simultaneously, NASDAQ’s significant gains suggest that investors are betting heavily on a future propelled by generative AI. It is evident that the world is entering an AI era, where massive productivity gains and profit growth come from embracing these transformative technologies.
This optimistic sentiment has overshadowed concerns about protracted policy tightening by major central banks and the prospect of a long-term high-interest-rate environment. Even fears of a potential recession, whether in the US or globally, seem to have been temporarily set aside.
In the forex arena, commodity currencies stole the show as they closed the week on a high note, as the best performers. New Zealand Dollar emerged as a frontrunner, outpacing its counterparts, Canadian and Australian Dollars.
On the flip side, the Japanese Yen found itself on shaky ground, earning the unenviable title of the week’s weakest currency. Trailing close behind Yen, European majors had lackluster performance.
Dollar, meanwhile, attempted to uncouple itself from its conventional inverse relationship with risk trends. Despite these efforts, it struggled to sustain any substantial follow-through, indicating the continued influence of global risk sentiment on the currency’s performance.
NASDAQ, DAX and Nikkei made impressive gains
NASDAQ’s rally from 10088.82 extended sharply higher last week to close at 12657.89. Near term outlook will stay bullish as long as 12209.57 support holds. Next target is key resistance zone around 13181.08, 50% retracement of 16212.22 to 10088.82 at 13150.52, and 100% projection of 10088.82 to 12269.55 from 10982.80 at 13163.53.
Strong resistance could be seen from this 13150/81 cluster zone to complete the rebound from 10088.82. However, sustained break of this level would carry larger bullish implication, and could prompt further upside acceleration through 61.8% retracement at 13873.08.
In Europe, Germany’s DAX was last week’s standout performer, reaching a new record intraday high of 16331.94. It’s expected to maintain this bullish stance, with 15754.76 serving as a support level. Next near term target is 61.8% projection of 11862.84 to 15658.56 from 11458.39 at 16804.14. Decisive break there could prompt further upside acceleration to 100% projection at 18301.92 later in the year.
In the larger picture, it should also be noted that 16804.14 is close to 61.8% projection of 8255.65 to 16290.19 from 11862.84 at 16828.18. So, this is really a hurdle to overcome for DAX. Yet, sustained break of this region will also be a strong long term bullish sign.
Over to Japan, Nikkei also hit the highest level in 33 years, driven by a series of strong corporate earnings. Yen’s depreciation due to rebound in global treasury yields has also been beneficial. But it could also be argued that the solid risk-on sentiment and selloff in Yen are reinforcing each other’s trend.
From a medium-term perspective, Nikkei’s outlook remains bullish as long as 28931.81 support level holds, with next target set at 61.8% projection of 16358.19 to 30714.52 from 24681.74 at 33553.95.
However, it’s essential to acknowledge that 33553.95 is close in proximity to 100% projection of 6994.89 to 24129.34 from 16358.19 at 33492.64. Hence, 33500 handle is a key level to overcome for Nikkei, before it’s in a position to challenge the record high of 39260 set in 1990.
10-year yield broke 55 D EMA decisively, more upside in favor
US 10-year yield staged a strong rally last week and took out both 55 D EMA (now at 3.5414) and 3.639 resistance decisively. There is also sign of upside acceleration as seen in D MACD. Further rise is now in favor as long as 55 D EMA holds, towards 4.091 resistance.
The correction from 4.333 might have completed with three waves down to 3.253, after drawing support from 55 W EMA (now at 3.2938). Sustained break of 4.091 will bolster the case for up trend resumption through 4.333. If realized, that would help lift USD/JPY for a genuine test on 151.93 high.
Dollar index rebounded further in third leg of consolidation pattern
Dollar index surged notably last week and broke decisively through 102.80 resistance. The development should confirm short term bottoming at 100.78, just ahead of 100.82 support. Further rally is now in favor as long as 55 D EMA (now at 102.51) holds, towards 105.88 resistance.
Nevertheless, it should be noted again that even though further rally is expected, bullish trend reversal is not warranted yet. Rise from 100.78 is seen as the third leg of the corrective pattern from 100.82 for now. Hence, strong resistance should be seen from 38.2% retracement of 114.77 to 100.82 at 106.14 to limit upside, at least on first attempt. This view will be maintained unless DXY shows clear sign of upside acceleration.
Kiwi ended as best performer, upside potential on hawkish RBNZ
NZD/JPY surged sharply higher as last week’s top mover, and just missed 161.8% projection of 80.42 to 83.88 from 81.53 at 87.12. Some volatility is likely in the coming days with RBNZ rate decision featured. Any hawkish surprise there could prompt another round of acceleration through 88.16 high to 261.8% projection at 90.58. Meanwhile, even in case of a pull back, outlook will stay cautiously bullish as long as 83.88 resistance turned support holds.
Kiwi also continued to outperform Aussie for the near term. AUD/NZD is set to resume the down trend from 1.1085. Immediate focus is on 1.0585 in the coming days. Decisive break there could trigger downside acceleration even through 1.0469 low to 100% projection of 1.1085 to 1.0585 from 1.0928 at 1.0428. And outlook will stay bearish as long as 1.0762 resistance holds, in case of recovery.
USD/JPY Weekly Outlook
USD/JPY’s rise from 127.20 resumed last week by breaking through 137.90 resistance. But as a temporary top was formed at 138.73, initial bias is turned neutral this week first. Downside of retreat should be contained by 136.31 support to bring another rally. Break of 138.73 will turn bias back to the upside for 100% projection of 127.20 to 137.90 from 129.62 at 140.32. Break there will target 142.48 fibonacci level.
In the bigger picture, rise from 127.20 is seen as the second leg of the corrective pattern from 151.93 high. Stronger rally would be seen to 61.8% retracement of 151.93 to 127.20 at 136.34. Sustained break there will pave the way back to retest 151.93. On the downside, however, break of 133.73 support will argue that the pattern could have started the third leg through 127.20 low.
In the long term picture, price action from 151.93 is seen as developing into a corrective pattern to up trend from 75.56 (2011 low). While deeper decline cannot be ruled out, downside should be contained by 38.2% retracement of 75.56 to 151.93 at 122.75.
