Forex Trading: Dollar Rallies Amid Global Economic Fears
Dollar Rallies amid Global Economic Fears
The US dollar posted gains against several of its main currency rivals on Friday, as concerns regarding an economic slowdown in the euro-zone combined with speculations that the Bank of Japan will initiate a new round of monetary easing caused investors to shift their funds to safe-haven currencies. This week, news out of the US, Japan and euro-zone is forecasted to generate volatility in the marketplace. Traders will want to pay attention to today’s US Existing Home Sales, the Bank of Japan’s Monetary Policy Statement on Tuesday, a Spanish bond auction on Thursday and finally the German Ifo Business Climate on Friday.
USD – US Home Sales Data May Lead to Dollar Volatility
Concerns that the euro-zone may slip deeper into recession, combined with expectations that the Bank of Japan will initiate a new round of monetary easing this week, led to risk aversion in the marketplace and gains for the safe-haven US dollar. Against the Swiss franc, the greenback gained more than 60 pips during the first half of the day, eventually peaking at 0.9490, before dropping back to 0.9454 where it finished out the week. The USD/JPY advanced more than 40 pips during mid-day trading to trade as high as 81.43, just below a recent 7 ½ month high. The pair closed the week at 81.31.
This week, dollar traders will want to pay attention to several potentially significant economic indicators. Today’s Existing Home Sales figure, set to be released at 15:00 GMT, may help the greenback extend its recent bullish trend if it comes in above the forecasted 4.76M. Later in the week, attention should be given to a speech from Fed Chairman Bernanke on Tuesday followed by the weekly unemployment claims figure on Wednesday. Traders will want to note that US markets will be closed on Thursday for the Thanksgiving holiday.
EUR – Greek, Spanish Worries Continue to Weigh on Euro
After posting gains during the middle of last week, the euro once again turned bearish on Friday, as concerns regarding the Greek and Spanish economies led to risk aversion in the marketplace. Specifically, investors are worried that Greece will be unable to secure a new round of badly needed bailout funds. In addition, Spain’s reluctance to request a bailout of its own has led to fears that borrowing costs in the country will remain high.
The EUR/USD fell more than 80 pips during the first part of the day on Friday, eventually trading as low as 1.2689, before bouncing back to 1.2741 where it finished out the week. The EUR/GBP dropped close to 50 pips over the course of the day before closing out the week at 0.8020.
This week, the main pieces of euro-zone news are likely to be Tuesday’s Eurogroup meetings, the German Flash Manufacturing PMI and Spanish bond auction on Thursday, and German Ifo Business Climate figure on Friday. Any increase in Spanish borrowing costs or worse than expected German data could result in the euro extending its bearish trend.
Gold – Gold Takes Slight Losses as “Fiscal Cliff” Looms
Gold saw moderate bearish movement on Friday, as concerns about the US “fiscal cliff”, when automatic spending cuts and tax increases will take place if Congress fails to reach a budget deal by the end of the year, led to uncertainties among investors. After dropping close to $10 an ounce during morning trading, eventually reaching as low as $1705.41, the precious metal was able to bounce back to $1713.42 where it finished out the week.
This week, gold traders will want to continue monitoring the negotiations between congressional leaders and President Obama aimed at avoiding the “fiscal cliff”. Any indication that a deal is closer to being reached may result in the price of gold falling. Conversely, if the negotiations remain deadlocked, risk aversion could send gold higher.
Crude Oil – Oil Prices Spike amid Increase in Middle East Violence
Investor fears that the current round of Middle East violence could disrupt oil supplies caused the price of crude to spike on Friday. The commodity shot up close to $2 a barrel during European trading, eventually reaching as high as $87.32. A slight downward correction brought prices down to $87.10 when markets closed for the weekend.
This week, traders will want to keep up to date with the latest developments in the Middle East, specifically the ongoing conflicts in Israel and Syria. Any escalation in violence is likely to result in supply side fears, which could drive oil prices up further.
In a sign that upward movement could occur in the coming days, the MACD/OsMA on the weekly chart appears close to forming a bullish cross. That being said, most other long-term technical indicators place this pair in neutral territory. Traders may want to take a wait and see approach until a clearer picture presents itself.
The Bollinger Bands on the daily chart are beginning to narrow, indicating that a price shift could occur in the near future. Additionally, the MACD/OsMA on the same chart has formed a bullish cross. Opening long positions may be the smart choice for this pair.
The Slow Stochastic on the weekly chart appears close to forming a bearish cross, indicating that this pair could see downward movement in the coming days. This theory is supported by the Williams Percent Range on the same chart, which has crossed into overbought territory. Opening short positions may be a wise choice for this pair.
Most long-term technical indicators indicate that this pair is range trading, meaning that a definitive trend is difficult to predict at this time. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the coming days.
The Wild Card
The Relative Strength Index on the daily chart is approaching overbought territory, indicating that a downward correction may occur in the near future. Furthermore, the same chart’s Slow Stochastic appears close to forming a bearish cross. Forex traders will want to keep an eye on these two indicators, as they may soon signal a bearish correction.