Forex Markets Driven by Dollar Moves
Forex markets have once again responded to the broader trends in the US Dollar, with the currency continuing with its longer term gains. Into the end of the week, however, market corrections were seen and the Euro and British Pound were two of the main beneficiaries of these moves. The EUR/USD is now trading firmly above the 1.35 level and the GBP/USD is now back above the 1.62 area once again. These moves are perhaps more important, however, given the proximity to historical resistance levels which will likely limit the prospects for these rallies to continue next week.
So, the main question for forex traders going forward is whether or not the US Dollar will be able to regain its footing and continue onward with the rebounds seen since the October lows. For the most part, the economic data is supportive for this type of outcome. Specifically, GDP numbers present the best case for continued Dollar strength. In the Eurozone, recent central bank activity shows that there are some real concerns for growth prospects going forward. This means the bank sees evidence that the sovereign debt crisis seen in the last few years has yet to reach its completion and is still negatively effecting credit markets.
Next Week’s Positioning for Currency Markets
In the week ahead in forex markets, we are likely to see some slowdown in trading activity given the proximity to the holiday season. This is another factor that could limit prospects for the Euro and Pound as traders that are long those currencies will likely look to take profits at these short term elevation levels. Since the EUR/USD and GBP/USD are also trading very close to easily identifiable levels of resistance, there is almost no incentive for these bullish traders to continue holding onto their positions.
For longer term traders, additional factors are still in play. Specifically, it is still critical to watch for any clues that the US Federal Reserve believes there is room to begin cutting back on monetary stimulus. If anything like this is seen, we should expect the Dollar to experience massive rallies into the end of the year. Without this, the main argument for pro-Dollar positions rests on the relative GDP performance of the US and its developed market counterparts.
For example, Japan and Eurozone have central bank bodies that are clearly looking to remain a supportive stance for the economy. As long as this continues, there are major strikes against both the Euro and the Japanese Yen, and the only real alternative for forex traders would be to move into the US Dollar. The Swiss franc is also likely to remain under pressure, given the SNB’s clear commitment to holding down the value of the EUR/CHF through policy intervention. These are the main themes to watched in the holiday thinned trading environment we are likely to see next week.