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Dollar Reverses Higher to Start the Year

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January 7, 2014 By: , No Comments

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Forex markets have posted reversals in the early 2014 sessions, with the Dollar showing a good deal of strength — particularly against the Euro and British Pound.Forex traders viewing these markets from a technical perspective might look to make the argument that the Dollar had entered into a period of prolonged oversold conditions and that an upside reversal was inevitable (with a need to move back toward longer term averages).

But the arguments for the recent moves in the Dollar can be explained by a lot more than simple technical analysis. Specifically, we are seeing some key divergences in the economic data. Stronger GDP and employment performances have encouraged the US Federal Reserve enough to begin removing monetary stimulus (with its latest announcement to taper its quantitative easing programs). In contrast, Purchasing Managers’ Index (PMI) reports out of countries like China and the UK have moved in the opposite direction, suggesting that the attempts at recovery in those areas are meeting headwinds.

The Week Ahead in Forex Markets

In the week ahead, forex traders will likely see the first major injection of price volatility as we head into the Friday session. This is when the always important Non Farm Payrolls number will be released. A strong number would be highly bullish for the greenback, as this would match the improving data that has been a feature of the last few months. The December release showed a monthly increase of 203,000 new jobs, which was much higher than the market’s consensus expectations. This came along with an improved unemployment rate of 7.0% (another beat in terms of the average forecast).

But what was most significant here was the fact that the better numbers created a precursor for the Fed’s tapering decision — and the same sorts of arguments might be made again if the Non Farm Payrolls numbers once again beat the market’s expectations. It should be remembered that the US Fed is the only major central bank that has committed to action in removing stimulus from the economy and this creates a the potential for a highly bullish scenario when we start to look at the greenback’s major trading counterparts.

In any case, we are likely to see some fireworks as we head into the Friday session. If we see a surprise to the downside, the potential moves could be just as large, as this would suggest that the previous trends of strength might be coming to an end. A scenario like this would lead to arguments that the Fed will be forced to pause its tapering plans — and this could help bring some buyers back into the Euro and British Pound. For those looking to trade the news event, it is a good idea to watch the trading range that precedes the number and look for a decisive break in either direction before committing to new positions.

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