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Euro and Pound Rally, But Are These Gains Sustainable?

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April 17, 2014 By: , No Comments

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Forex markets traded mostly one-sided last week, with most of the selling pressure focused on the US Dollar.  For many forex traders, this activity came as a significant surprise given the fact that most of the correlated asset classes were seen trading in ways that did not support this type of conclusion to the week.  Specifically, the US Dollar tends to make gains when the major stock benchmarks are in decline.  The reason for comes from the simple fact that any time an investor willpull its money out of the stock market, they will do so for cash — actual currency.  This lifts demand for the currency, especially in cases where a majority of the market starts to act in the same direction.

With the NASDAQ seeing major bear moves last week and the S&P 500 having its worst week since January, most investors would have been expecting the US Dollar to make gains during the same time periods.  But this did not turn out to be the case, as currency pairs like the EUR/USD and the GBP/USD are now trading back toward longer term highs.  Active forex traders should be looking for new opportunities in these moves, however, because there is not much in the underlying fundamentals to support bull positions in these currency choices.

So while there is little reason to expect we will see significant near term reversals in the Euro or Pound, there is a strong case to start building short positions in these currencies as there are excellent risk to reward prospects given the currently elevated levels.

The Week Ahead in Forex Markets:  Central Bank Biases Do Not Support Recent Moves

In the week ahead, forex traders will need to pay special attention to the public commentaries that are made by central bank members around the world.  Most important here will be any guidance that is given by members of the Federal Reserve of the European Central Bank (ECB).  Major moves could be seen if the ECB continues to signal concerns over the growth prospects in the Eurozone.  This would lead many traders to start establishing new positions based on the belief that the ECB will be forced to cut interest rates or find new ways to add stimulus to the regional economic.

This, of course, is an entirely different scenario when we compare the likely prospects from the Federal Reserve.  The Fed has made it clear that there is now an exit strategy firmly in place and that QE programs will be discontinued by the end of this year.  Broadly speaking, this is a bullish scenario for the Dollar and should give many forex traders reason to start considering sell positions in both the EUR/USD and the GBP/USD.  We could be in for some significant moves in the second half of this year, and there are good opportunities to start gaining exposure here at current levels.

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