Currencies Trade At Major Inflection Points
Forex markets are trading at major inflection points, with most investors fluctuating between alternate viewpoints with respect to what will drive the next trending move. At the moment, forex traders are assessing central bank commentaries and then comparing those ideas with what is actually present in the economic data. Most central banks around the world have made it clearthat economic stimulus is necessary. Examples here include the European Centra Bank, the Reserve Bank of Australia, the Bank of Japan, and the People’s Bank of China. At the same time, the US Federal Reserve has recently hinted at the fact that stimulus might no longer be necessary.
These types of diverging policy perspectives, in most cases, are exactly what forex traders are looking for when pairing weak currencies against stronger currencies for position trading. Given this model, the US Dollar should be a clear winner against all the currencies that are still in the early phases of their stimulus programs. But, when we look at the charts, the overall conditions are more choppy and less clear cut. Against the Australian Dollar, the US Dollar is trading at its highest levels in nearly three years. General momentum against the Japanese Yen as well is positive for the US currency. Against the Euro, moderate weakness is seen (something that should be surprising, given the relative weakness of the economy).
What is complicating the overall trend picture is the fact that positive economic data out of the US can mean one of two things: On the one hand, good data is positive because it means a sustained economic recovery. On the other hand, it is an implicit confirmation stimulus programs in the US will, indeed be ending — and this could weigh on the longer term growth picture. Expect these two sides to continue fighting it out, as it is clear markets have yet to decide whether or not to believe stimulus programs are ending in the US and continuing in other parts of the world.
The Week Ahead in Forex
Next week forex markets are likely to start focusing on Euro data, as there is not much to be seen in the way of fresh economic info out of the US. On Tuesday, we will have quarterly GDP data out of Italy, along with a series of data pieces out of Germany. These will include Factory Orders, Industrial Production, and Trade Balance releases — all to be made public in the later parts of the week. For the most part, these are second tier date releases, so is it likely that we are in store for a week of quiet trading and potential reversals to most of the trends that have been seen in the latest sessions. For this reason, it makes sense to base trades on technical analysis, in order to spot instances of short term trend reversals.