Analysis of Monday’s financial markets rally and why it could weaken

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Monday’s impressive market rally grabbed the bullish headlines, but there are signs that this was a regulatory style price adjustment rather than the start of a new trend.

In equity markets, the Dow Jones Industrial Average posted its most impressive daily gain since March and the Russell 2000 Index was up 2.16% on the day. Overnight, the Nikkei 225 jumped more than 3% to offset Monday’s price drop as Asian markets were usurped by weekend US nervousness.

USDJPY

These short-term trading strategies would have appreciated a significant increase in volatility in the forex markets. The USDJPY has seen intraday price movements above 0.50% and steadily rising prices.

USDJPY – Monday’s price hike

Source: IG

USDJPY – Daily rising Wedge & Volumes chart

Source: IG

EURUSD

The EURUSD price chart reflects other markets, but waning bullish momentum could be a warning to those taking the risk.

Source: IG

Also note on the USDJPY daily chart that Monday’s trading volumes were lower than Thursday when the risk evasion began. In short, Monday’s move wasn’t as widely supported as some bulls would have liked. It also looks a lot like a bounce off the long term support trendline rather than a breakout to the upside. Even after the surge, the USDJPY price is in the middle of the range of a bullish coin pattern that still offers little clue as to how it will end.

Is it a good time to buy the dips?

Nothing can be guaranteed, and Monday’s decision might not be the new dawn the Bulls were hoping for. Technical data indicates low volume markets are rebounding from multi-month price support levels. By the European opening on Tuesday, some markets such as EURUSD had already lost their bullish momentum.

It should be remembered that the catalyst for last week’s sell-off was the news that the US Federal Reserve said it was talking about interest rate hikes. Fed Chairman Jerome Powell spoke last Wednesday when he made it clear that interest rate hikes would be brought forward. Hikes planned for 2024 would now be more likely to be observed in 2023; any forecast for 2023 can now appear in 2022. slow motion which followed suggested that investors and analysts were nervously working on timetables two and three years ahead, but by Monday morning they concluded that it was foolish to worry about events in the future. The years 2022, 2023 and 2024 had all been mentioned but there was nothing in the Fed’s statement regarding 2021.

It can represent overconfidence. The real threat to the impressive multi-month bull run is not interest rate policy, but the weakening of quantitative easing. The $ 700 billion package announced in March 2020 flooded markets with cash that must have found a home somewhere. This has inflated asset prices, but the Fed is now sitting on $ 2 billion in assets. There will come a time when the Fed will start, speak, speak, decline and even the suggestion that the conversation is about to begin is a much greater risk to prices.

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