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Euro Still in Markets Central Focus

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June 10, 2014 By: , No Comments

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Forex markets saw some reductions in price volatility last week, as traders settled positions in anticipation of the next big market mover.Over the last few weeks, we have outlined some of the reasons why the Euro is plummeting versus the US Dollar but there has been little so far to change the outlook and this ultimately means that any rallies in the Euro are likely to be met with selling pressure as forex traders look to take advantage of elevated price levels.

Most of the bearishness in the Euro is being driven by weakening economic data (flatlining growth and elevated regional unemployment rates).  But more recently the focus has shifted onto the European Central Bank (ECB), as they have started to show a greater willingness to implement stimulus measures.  Because of this, it is relatively clear that the Euro will be associated with historically low interest rates for an extended period of time.  The next week will be critical as far as developments in this space, as we could see additional commentary from the ECB in the coming sessions.

The Week Ahead in Forex Markets:  Beware of Building Momentum

In the week ahead, forex traders will to pay more attention to public commentaries that are released by the European Central Bank (ECB).  Any suggestion that the ECB is prepared to start adding stimulus will lead to renewed drops in the Euro against all of its major forex counterparts.  So far, most of the selling in the Euro has been done against the Dollar with the EUR/USD falling sharply after hitting the 1.40 level.

But this could start to change soon, as forex traders adjust to the fact that the Eurozone is likely to lag behind in relative growth performances in developed markets.  This would mean much deeper declines in pairs like the EUR/GBP and the EUR/JPY as these pairs have yet to change in valuation as much as the EUR/USD.

Most importantly, traders will need to position for increased volatility in the Euro, even though we are heading into the summer months.  This time of year tends to see reduced liquidity levels (and this generally means smaller price moves in the market as a whole).  But this could actually work in reverse direction this time as reduced liquidity levels can also create sharper price moves (as there are fewer buyers and sellers with position orders open in the market).

So if we do see some surprises out of the ECB, we could see a bumpy road ahead in the Euro.  Any surprise is more likely to be on the dovish side (ie. more economic stimulus), and if this turns out to be the case we can expect declines in the EUR/GBP and EUR/JPY.

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