Dollar Sentiment Turns as Fed, Budget Debate Send Prices Lower
Forex markets could be on the verge of a major new shift in trend direction as most of the activity in the US Dollar is being based on a series of long term event risks. Recent weakness in the greenback has been based on the apparent reluctance at the US Federal Reserve to begin reducing its monthly quantitative easing purchases. This became clear at the conclusion of the central bank’sSeptember meeting, where no change was made to the $85 billion in monthly buys in Treasuries and mortgage backed securities.
This is a bearish factor for the US Dollar, and this has led to upside pressure in currency pairs like the EUR/USD and the GBP/USD. For those paying close attention to macro releases, this might come as something of a surprise. When we look at the relative growth prospects in the UK versus the US, some significant differences can be seen. Second quarter GDP in the UK disappointed market expectations, coming in at 0.7% on an annual basis. This is nearly 2% lower than the growth rate seen in the US, so the recent rally in the GBP/USD above 1.61 is now being looked at by many as an excellent opportunity to start selling.
The Week Ahead in Forex Markets
Looking ahead to next week, most of the changes in price activity will likely be based on central bank sentiment (and any developments in the US Debt Ceiling debate), rather than on simplified economic data. At the moment, most of these factors are pointing to continued downside in the US Dollar, instead favoring currencies like the Euro, Pound, and Japanese Yen. It should be remembered, however, that we are trading at elevated levels in these currencies, so there is some strong scope for downside if we do see any developing catalysts that can drive the Dollar higher.
It should also be noted that there are some important economic releases scheduled for next week, as the always critical Non Farm Payrolls will be made public on October 4th. We will also have the Services ISM report, even more important because the service sector makes up a much larger portion of the economy when compared to manufacturing. But in any case, these data reports will be viewed mostly in light of the broader central bank stance and any evidence that we will see the Fed continue to avoid tapering will continue to put pressure on the Dollar.
Forex traders that are operating on short term time horizons should look to sell downside breakouts in the US Dollar. But for those with a longer term perspective (into the end of the year), it makes much more sense to start buying into this weakness as these moves are starting to look over-extended. There is not much left to consider in terms of fundamental drivers but markets should prepare for increased volatility in coming sessions as investors re-adjust previous positions.