Dollar Declines But Moves Look Unsustainable
Forex markets traded in ways that match most of the trends seen this year, with the US Dollar once again under pressure against the Euro. At this stage, it is starting to look as though markets are caught trading in an elevated range but we have still yet to make significant headway when we look at the highs that have been made in previoussessions this year.
The lack of any real progress in the US Dollar does give us reason to believe that further declines can still be seen. But moves like this can only happen for so long, and when these type of events fail to agree with the underlying fundamentals, the stage is ripe for new contrarian positions to be established. Clear lines in the sand can be found at 1.40 in the EUR/USD and 1.70 in the GBP/USD. The fact that these areas line up nicely with important psychological levels does make active trading much easier and it gives forex traders clearly defined price regions to watch as a means for gauging broader market sentiment.
Going forward, it will be important for forex traders to use limited positioning as markets approach these levels. Level proximity is close enough at this stage that market tests here could come as early as next week. The real concern is market volatility if these areas do trade, and this increases the potential for false breaks and stop loss slippage if you are not dealing with a broker that will guarantee your stop losses. If this is not the case, you will definitely need to use smaller position sizes, as there is clear reason to believe that volatility in forex markets could be seen before the end of this month.
The Week Ahead in Forex Markets: Prepare for Potential Price Volatility
In the week ahead, forex traders will need to closely manage their positions if the chosen currency vehicle is the EUR/USD or GBP/USD. On balance, risk to reward ratios clearly favor the downside in both pairs and this applies to strategies that focus on both the technical and fundamental perspective. This does not mean that markets will be able to avoid important breaks through the 1.40 and 1.70 levels. But if you have to choose a side, it does mean that there is much more risk for those that are looking to establish anti-Dollar positions.
News driven moves will likely be inspired by analyst arguments that support or deny the potential for the US Federal Reserve to start removing stimulus from the US economy. Positive economic data is the best way of gauging the likelihood these stories will begin to surface, so it will be important to watch the releases in developed markets as opposed to what is seen in emerging markets.