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Forex Markets Look For Direction after Fed

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September 22, 2013 By: , No Comments

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Forex markets responded in the typical fashion this week, given the fact that the latest Federal Reserve meeting has left investors with little in the way of actionable information.  Wednesday’s FOMC meeting resulted in “no change” in monetary policy and no reductions in quantitativeeasing programs.  Markets were looking for a $10 billion taper in the Fed’s monthly asset purchases, so the eventual surprise sent the US Dollar lower and drove traders back into higher yielding currencies like the Australian Dollar and the Euro.

All forex traders were waiting for last week was the penultimate quantitative easing decision from the US Federal Reserve, which showed that no immediate changes will be made to the post-crisis quantitative easing programs enacted after 2008.  But these reactions are most likely temporary in nature, and the lack of action by the Fed leaves markets directionless.  At this stage, forex traders are asking important questions:  What do we do next in our trades, where do we go from here, what will be the next dominant trend?  Those of us with actual trading experience know that this is the calm before the storm, and that markets will become volatile again once the Fed takes a material stance and makes a true commitment to reverse its dovish policy.

Next Week’s Positioning for Currency Markets

My favorite plays in next week’s forex markets will be short term in nature.  No real reason to buy the Euro and Pound, given the elevated levels we are currently seeing.  What the market is missing at this stage is the fact that Fed will begin tapering — it is just a matter of when this will actually start.  Dollar bulls will need to hear hawkish policy initiatives that are more substantive, but this is an inevitability and we have already seen commentary suggesting that this could come as early as next month.  This ultimately suggests that the reactions seen last week should not be interpreted as sustainable.

Economic data will be less of a factor next week, as markets are in a holding pattern and most investor sentiment will be determined by central bank commentary.  Looking at specific approaches, traders should look to use downside breakout strategies in the Euro and the Pound, as markets are likely done responding to near term reactions in what is really a changing market environment.  Dollar is destined to be higher, and traders should position accordingly.  If we do see the Dollar start moving higher, this will essentially lead to an extended downside in negatively correlated assets (high yielders like the Australian Dollar).  This also means that traders in gold should remain cautious into the finals months of this year.  In any case, it will be important to keep stops tight when making any forex trades, as we are on the cusp of a major trending direction that will be defined by any decisions to begin phasing out accommodative central bank policy at the US Federal Reserve.

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