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Markets Buy Dollar After Fed

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February 23, 2014 By: , No Comments

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Forex markets are currently in consolidative territory after key pairs like the EUR/USD and GBP/USD continue to trade near long term highs.  There are some key questions to be asked here, as there is a clear disconnect between market fundamentals and the underlying prices in forex.  So, is sentiment guiding forex markets, or are rational buying and selling decisions being made?  If we look at relative GDP growth or central bank policy measures, the answer to this question starts to look very suspicious.

The latest evidence for this comes from the fact that this week’s policy statements have made it clear that the Fed intends to remove stimulus programs from the economy altogether.  This is not something that can be said for any other major economy.  The Eurozone remains mired in a debilitating debt crisis and the UK economy is still posting growth rates that are firmly below 1%.  If you think that economic stimulus programs in Japan (copied from the US model) are likely to end any time soon, you need to read up on your history.  Japan is the most indebted country in the world (by a factor of more than 2) and this will not be resolved in my lifetime (I am 33 years old).

The Week Ahead in Forex Markets:  Watch for Risk Currencies to Make Gains

In the week ahead, forex traders should be looking to work against any extreme moves that do not agree with the underlying market fundamentals.  There will be two key areas to watch going forward: maco data and central bank commentaries.  As always, the market will be driven by any guidance that is given by the Federal Reserve.  This should be evident based on the stalling moves that were seen into the end of the last week.  The Fed explained that QE stimulus programs were ready to end, and uptrends in the EUR/USD and GBP/USD gave back their gains.

Several large forex websites have started to report stories suggesting that this is part of a much larger move in the Dollar, and that the EUR and GBP will be the stars of 2014.  The current market fundamentals do nothing to support this, so it should be remembered that any positions actually taken to the upside in EUR/USD and GBP/USD will need to be based completely on technical analysis.  The underlying fundamentals are just not there.

In central banks, the key area to watch is the level of confidence that is emitted from voting members.  If we see language that suggests concern, look to buy the US Dollar.  This will mean that the globe is still in need of stimulus programs and this will encourage risk taking in the broader markets.  Comments in the reverse will suggest that stimulus programs are no longer necessary, and this will bring buyers back into the US Dollar at these cheaper levels.

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