Just to register how a political (and historical) event can affect the Forex Market, here's Forexyard market analysis:
On Monday, the U.S. Dollar made extremely significant gains against most of its major currency pairs ahead of Barack Obama's inauguration, which takes place later today. This is in contrast to Sunday's trading session that saw the Dollar go bearish against its main currency pairs, such as the GBP and the EUR. The Dollar's rebound since the start of Tuesday's trading session has left many traders excited at the prospects of what lies ahead of them in the coming trading days.
The Dollar gained a massive 300 pips against the EUR, and a massive 550 pips versus the GBP, to close yesterday's trading at 1.3038 and 1.4308 respectively. The Dollar also rose against the JPY to close yesterday's session at 90.34. The Dollar has also continued to maintain its strength since the start of today's trading. There are a number of important factors that contributed to the Dollar's spike yesterday. These include optimism in the U.S. ahead of Barack Obama's inauguration, low trading volume, and the bleak outlook for Britain and the Euro-Zone.
As the Obama's inauguration becomes closer, the Dollar has been responding with bullishness. Investors have been attracted to the Dollar, due to renewed optimism of a new U.S. administration that may do away with adversary politics in the U.S. Not only that: it seems that there is wide support for Obama's additional $850 billion stimulus plan. As of late, he seems the only man that can rescue the U.S. from her dire economic situation. Therefore, as the excitement builds, so does the value of the Dollar.
The low trading volume on Monday, owed to few news events coming out of Europe and the U.S. as the Martin Luther King Jr. bank holiday also helped the Dollar gain strength. Adding to this, officials from the European Central Bank (ECB) said that the Euro-Zone's economy is likely to slump 1.9%, rather than the previously forecasted 1%. This obviously added to the EUR's decline against the Dollar
Yesterday, in regards to the GBP's decline, the Royal Bank OF Scotland (RBS) set shock waves through Britain and Europe as RBS's shares declined 67%. This led to renewed fears of nationalization of Banks across Britain. These different factors show that economic woes across the Atlantic may continue to support the Dollar.
The issue that may have played mostly into trading when it came to the EUR and the GBP against the U.S. is the inauguration of Barack Obama later today. Investors and most of the U.S. populous see Obama as the only man that may be able to pull America out of the worst economic crisis since "The Great Depression." This is likely to play into investor's behavior in the coming trading days too.
Fundamental analysis and technical analysis are the two basic tools used to follow and predict the behavior of the forex market.
While fundamental analysis considers the factors that affect a country's economy and its effect on its currency, technical analysis predicts price movements and market trends by studyimg what has actually happened in the past. Technical analysis looks at the past performance and history of an investment and creates charts to be used as primary tools. It relies on data showing this history and current trends and patterns to make predictions of future market activity. It ignores the intrinsic value of the investment in favor of its statistical abstract. Technical analysis is only concerned with price movements and not with the reasons for any changes.
Technical analysis is used to identify significant patterns of market behavior. The history of the value of currency pairs is a matter of statistical record and can be easily accessed. Its supporters claim it is the only sure way of understanding the market and predicting its future based on the high probability that certain recognized patterns tend to repeat themselves on a consistent basis. This is especially true in the Forex market. Fans of technical analysis say that the economies of modern nations are so complex that they no longer can be accurately predicated. It is only in the study of the past history of the currency and the trends that are revealed that a possible glimpse of the future be found.
Forex technical analysis aims to support the investor in determining his views and forecasts regarding the exchange rates of currency pairs. The technical approach concentrates on prices and is based on objective tools like charts and tables, which neutralize external factors and emotions. It can and should be used to project movements in the Forex trade. Of course, in the end, it is going to be the investor's own preference that settles the question, and this is true of the market. Both fundamental analysis and technical analysis are mere tools that help make the decisions that in the end only the investor can make.
How can one predict market movements in Forex trading?
The two most useful tools used to forecast the behavior of the forex market are technical analysis and fundamental analysis. Technical analysis is concerned with the effects while fundamental analysis studies the causes of market movements.
Fundamental analysis forecasts future price movements based on economic, political, environmental and other relevant factors, like seasonal cycles, supply and demand, government policy. Fundamental analysis is a macro assessment of where a currency should be traded based on the movement of the currency's price itself. The economic conditions of the country, monetary policy and other fundamental elements play an important role on this assessment. Many profitable forex trades are made moments prior, or shortly after, major economic announcements.
Fundamental analysis considers the intrinsic value of an investment when making a decision as to its future activity. There are some who feel that this is an excellent method of making decisions in the Stock market as a lot of data can be gathered and studied concerning the value of a Company. But how can a Nation have an intrinsic value?
The answer is fairly simple. The economy of a country goes through a basic business cycle, and there are a lot of indicators available to the investor to measure where a particular economy stands at any given time. Such indicators are followed by traders worldwide. The analysis would involve matching the stage of the cycle with its impact on the value of its currency. The normal economic cycle consists of periods of inflation and deflation with peaks and troughs in between. Certain indicators such as the Gross National Product (GNP), Employment Report, Consumer Price Index and current prime interest rates can give a good idea of the stage of the economy at any given time.
Each of these indicators would tend to impact currency valuation in different ways, and sometimes would even vary from country to country. In the United States, rising interest rates are normally associated with currency deflation, for example, and it is factors such as this that are the heart of fundamental analysis. This analysis can become quite detailed, but the focus remains on the country and its economy. Every factor that impacts the country and its economy can play a role in the value of the currency, and understanding these factors are the tools the fundamental analyzers use to guide their investment strategy.
Economic News
USD Dollar Rises on Risk Aversion Trader's aversion to risk has continued to push safer currencies higher as global equity markets continue to trend lower. Both the Nikkei and Dow Jones Industrials ended lower yesterday and that has been influencing the currency markets. The financial markets show the concerns of a global recession. Traders have been unraveling riskier investments financed with loans from currencies with ultra low Interest Rates, predominately in the USD and the Yen. These two currencies may continue to see support in the short term as investors lose confidence in riskier assets.
The Dollar continued a 3-day rally against the EUR, finishing the day up at 1.3328. The Dollar also posted significant gains against the GBP, sending the pair down 2% to finish the day down 1.4774.
Trading today and tomorrow may be based on fundamental data coming from the United States. The U.S. trade balance report will be released today at 13:30 GMT and is expected to show a decline in the difference between U.S. exports and imports. Tomorrow the monthly retail sales report will be released. This report has proven increasingly difficult to accurately forecast. Traders will be looking for these reports for positive economic data to give direction for the struggling U.S. economy. EUR EUR Stops its Slide against the GBP The EUR continues to lose ground against the Dollar as added market risk weighs on the European currency. However, the currency did break a 4-day losing streak against the GBP to close the day up at 0.9020.
The EUR/GBP, which last year saw an appreciation in excess of 26%, has given back some of those gains so far this year. The drop in the GBP's valuation stems from an ever more deteriorating economic situation. The Bank of England (BoE) has slashed Interest Rates, at times cutting rates much faster and steeper than forecasted. British Interest Rates are predicted to fall close to 0% in the near future, and the next step of action perhaps could be the printing of new money or the purchase of commercial debt to stimulate the British economy.
The economic downturn has been very sharp for Britain and currently Interest Rates stand at an all time low. Despite the British recession, the Pound may be poised to head higher against the EUR on future European Interest Rate moves later this week.
Most traders are anxiously awaiting the Interest Rate decision by the European Central Bank (ECB). In this Thursday's meeting, the ECB is expected to cut rates by 0.50%. So despite the recessionary trends, we may see the EUR/GBP head lower on ECB rate cuts, with perhaps a return below the 0.8900 mark. JPY JPY Breaks Support Line As risk aversion heads higher, so does the value of the Yen. Yesterday the JPY strengthened across the board and dropped below a significant support line. At one point in yesterday's trading the USD/JPY fell to a low of 88.86 before ending the day at 89.27. The large price swing may be attributed to low levels of liquidity as Japanese markets were closed yesterday for a bank holiday.
This is the fourth consecutive day for a strengthening Yen. The renewed gains sparked further speculation of Japanese government intervention in the currency markets. A strong Yen hurts Japanese exports, a major component of the Japanese economy. The government has made pledges to intervene in the open market, but we have yet to see a firm commitment to help weaken the currency.
Traders may look for the Yen to perhaps continue its bullish run. Keep an eye for the U.S. trade balance report today. This may help to send the JPY higher against the Dollar, possibly below the 89.00 level. Oil Crude Drops below $40 Crude Oil continues to head lower for the 4th day in a row. The driving factor is concerns of the slowing global economy. Rising supplies and lower demand has pushed the price of Crude below the $40 level. This was a support line that many analysts said could not be broken.
The end to a gas feud between Russia and Ukraine did little to lower the risk tolerance in the market and traders continued to move out of equities and riskier commodities throughout the day. This spat was the start of the Crude rally at the beginning of the year. Now the price of Crude Oil stands below this psychological mark. Many of the concerns are on the demand side due to a global recession.
Some are calling for Oil to be priced at $25; however this figure may be a bit to bearish, even for the most skeptical of Crude Oil traders. A $35 mark could be reachable by the end of today's trading.
Technical News
EUR/USD It appears that the bearish trend may have run out of strength as the current price level has dropped the pair into the oversold territory as the 4 hour chart's RSI reveals. The pair also currently floats near the bottom barrier of the daily chart's Slow Stochastic, suggesting a bullish correction may be imminent. In that case, going long with tight stops may be the correct strategy. GBP/USD The typical range trading on the hourly chart continues. Both the daily RSI and Slow Stochastic are floating in neutral territory. However, the 4 hour chart's RSI can already be seen in the oversold territory. It appears that the possible next move might be a bullish one. When the upwards breach occurs, going long with tight stops appears to be preferable strategy. USD/JPY The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the 4 hour chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy. USD/CHF Narrow range trading continues as the pair did not make a significant move in either direction, and is currently traded around the 1.12 level. The 4 hour chart's RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
