The low volume and tight ranges this week in the Forex markets indicate the table has been set for a possible volatile day of trading as all eyes will be on Federal Reserve Chairman Ben Bernanke as he delivers his speech today at theJackson Holecentral banker’s summit.
Financial markets are bracing for Bernanke to deliver the speech that could unveil the plan to stimulate the sluggishU.S.economy. Last year he used this opportunity to launch the idea of quantitative easing, a move that provided the equity and commodity markets with the liquidity to rally sharply higher while pressuring the U.S. Dollar.
While expectations may have been high at the onset of the week, recent trading action has been signaling that perhaps Ben will not have the firepower this time to rock the markets like he did last year. Having seen the not too positive effects of QE2 on theU.S.economy, it is becoming highly likely that Bernanke will refrain from signaling the start of a third round of quantitative easing.
If a trader retained the slight bullishness seen in the equity markets earlier in the week, he could be in for a big disappointment. To begin with, economic conditions have changed somewhat since last year.
Inflation is higher which means throwing new money at the economy may not be as beneficial. Secondly, the situation has changed inWashingtonfollowing this summer’s highly publicized fight between the spend-happy Democrats and the spending-cut happy Republicans.
It is going to be much hard to sell the idea of providing more funds to the economy after the recent effort failed to create jobs and served as a launching pad for higher corporate and consumer expenses. Finally, Bernanke doesn’t have the total support of the Fed at this time because of the three dissenters who oppose the Fed’s decision to keep interest rates at historically low levels until mid-2013.
Based on these fresh developments, it is hard to see Bernanke delivering more than a candy-coated speech stating the Fed’s objective to keep inflation under control while promoting growth. He may even make a speech that is so general that it triggers a volatile two-sided trade because this would likely provide more uncertainty for both bullish and bearish traders.
Given the Fed’s low interest rate stance for the next 20 plus months and the slim possibility of additional stimuli, it’s hard to believe that Bernanke can say anything that will support the U.S. Dollar. It appears the long-term path of the Dollar is likely to remain down; however, there may be a knee-jerk reaction to the upside if investor’s decide to dump riskier assets.
The USD/CAD pair fell, and then found support at the 0.9800 level on Thursday. The pair is bearish overall, but over the course of the last couple of weeks has found a bid. The oil markets and the Jackson Hole announcement will be key for this pair. The thought of QE3 will weaken the USD against most currencies, and the Loonie will certainly be one of them. If the QE3 plans are announced, oil will move higher, and as a result – so will the CAD, which means this pair falls. If not, we could see an attempt to break parity.
The NZD/USD pair fell after first rising on Thursday. The resulting candle was a shooting star, and the pair now looks vulnerable to the downside. However, with Ben Bernanke’s news conference coming out today, there is always the risk of headline news moving the currency markets. If the US goes into another round of quantitative easing, this pair will rise rapidly as commodities in general are bought up. The high-yielding Kiwi will more than likely become a favorite amongst traders again. If the Fed doesn’t announce a QE3-type deal, this pair could continue to act weak. Technically, a break of either end of the candle would point the way in the direction of the break for traders.
The GBP/USD pair fell on Thursday, continuing a move that started on Wednesday. The pair looks extraordinarily weak, as it keeps falling. The 1.6250 area should serve as some kind of minor support, but this latest move has shown the way for this pair. We feel that rallies can be sold at this point, and fresh lows below the Thursday mark could be selling opportunities as well. With the Jackson Hole announcement coming out today, the pair could suddenly reverse direction if the Fed Chairman announces potential QE3. However, without that announcement being made – this pair should continue to fall overall.
EUR/CHF attempted, and then failed to break the 1.15 level on Thursday. The Swiss National Bank is currently active in weakening the Franc, especially against the Euro. Because of this, the pair will continue to struggle to fall. However, the trend is down, and we cannot fight it. Until we get a solid and large green candle that closes above the 1.15 level, buying this pair won’t be in our plans. A large red candle could get us selling, but even then we would have to take profits a little quicker than usual as the SNB is willing to step in.
AUD/USD fell after first rising on Thursday. The pair failed to stay above the 1.05 level again, and it appears that the path of least resistance is down at this point. However, with the Jackson Hole announcement coming out later today, all bets are off. If there is an announcement of another round of quantitative easing on the way, this pair will shoot straight up. If it isn’t mentioned, there is a good chance that this pair continues to fall. In the mean time, smart traders are waiting until after that news conference.
The EUR/USD pair tried to break above the 1.45 level again on Wednesday, but failed yet again. The US Durable Goods numbers came in much higher than expected, and as a result – the Americans sold off their currency and looked for risk elsewhere. As a general rule, this works as stock traders go into places like Europe. However, with the Jackson Hole Fed Retreat being held, the real question is whether or not Mr. Bernanke will announce a form of QE3. If he does, the Euro should get a massive bounce from here. If he doesn’t – that would be USD positive. Until that announcement on Friday, this pair will be stuck in this area.
The USD/JPY pair rose on Wednesday, as traders began to sell off the US Treasury market, thus driving up the yield on most notes. As money flow goes, chasing yield is one of the simplest explanations for currency moves. While most forex traders act in a vacuum, the truth is that even thought the market is the largest one – it follows other markets more often than not. In reality, the bond market is the dog, and the forex market the tail. Money goes to where it is treated better, and in this case – that is starting to tilt towards the United States. While it is too early to call this a buy at this point, if we reach 77.50, we feel this pair will keep rising.
The GBP/USD pair fell on Wednesday as traders sold off the Pound against the Greenback. The dollar had been believed for some time to be about to be weakened by the Fed on Friday as it introduced QE3. The fact that the market is starting to see Durable Goods orders and money supply in the US rise, it shows that the Fed is less likely to ease, and therefore the relatively weak Pound will suffer against it. Of course, this can all change on Friday, but the 1.65 level has held quite firmly as of late, and it appears we are heading lower. A break of the lows on Wednesday has us selling again.
The USD/CHF pair rose slightly on Wednesday, but still failed to break above the 0.8000 level – a level that has been massively resistive over the last couple of weeks. Until we get an announcement out of the Jackson Hole central bankers retreat, it is very likely that this pair sits still as the Swiss National Bank is currently sitting below, and is willing to step into the market and put pressure on the Franc. However, unless there is QE3 being announced on Friday – the upside will be limited as well.
The AUD/USD pair initially tried to rally during the course of the day on Wednesday, but turned back around near the 0.71 level in order to fall significantly and form a bit of a shooting star. Because of this, we feel it’s only a matter of time before we break down, and a move below the 0.70 level should be a selling opportunity. We have no interest in buying this market at the moment, and if it rallies we will simply look for resistive candles above to start selling again. We believe the US dollar will continue to be favored overall, and that of course will have a massive effect on this market.
The USD/CAD pair had a very neutral day on Wednesday as the market didn’t get much in the way of news to push it around. With the oil markets being so quiet, there is little to push the Loonie around. The pair continues to be a scalper’s market until it breaks above the parity level, or below the 0.98 level. Until then, we can only take small positions with small trades.
The NZD/USD pair fell slightly on Wednesday as the pair continues to consolidate just under the 0.83 level. The area is a minor support and resistance area, and until we get some clear indication out of the Federal Reserve on any future QE3 plans on Friday – we may see very little action in this pair. The Kiwi dollar being a commodity currency will be directly affected by the plans of the Fed for the Dollar. Any hint of QE3 sends this pair much higher on Friday, but until that announcement, it might be a quiet market.
EUR/USD rose on Tuesday as traders bought stocks and risk-related assets around the world. The candle that was formed rose all the way to 1.45, but was sold aggressively as the level hold again. The close is just below the downtrend line that we have also drawn on the chart as well. Because of this, even with the massive bullish action during the session, we feel that this pair isn’t’ quite ready to launch just yet. The pair would have to close above the 1.45 level on the daily chart first for us to get in on the long side. A break below the lows on Tuesday would signal selling for us in this pair.
For the last 5 sessions, the GBP/USD has tried to break through the 1.65 level. While it can do that, it simply cannot stay above that level. Tuesday saw a shooting star form from this level, and the technical set up is certainly to the downside. The breaking of the bottom of the Tuesday candle signals selling, and this could lead to the lower levels of the recent consolidation area, which would have us looking for 1.61 roughly. A break to the upside would have to break the Friday highs in order to get us bullish of this pair.