Forex Yo-Yo markets likely to persist
China’s troubles have rocked the sense of complacency in risk assets and currencies. But the mixed messages coming out of the US Federal Reserve are not helping either.
Contradictory statements from different Fed officials clearly reflect divided opinions within the central bank. One minute it looks like a US interest hike later this month is on, then it isn’t and so far the market is siding with the later view given the market volatility.
Raising interest rate in the midst of tumbling equity markets and growing pessimism over the global economy could look foolhardy in retrospect. China’s economy, meanwhile, appears to be slowing down, though it is still growing, but this is having big ramifications across Asian and commodity producing nations. But at least China’s service sector seems to be performing well.
EUR/USD – likely to remain choppy
Indeed, the markets have a transitionary feeling about them, such as China no longer leading global growth and the Fed’s eagerness to shift the US interest rate cycle upwards.
If indeed markets are at some kind of crossroads then more volatility can be expected. Rather than tightening monetary policy, central banks may come under pressure to loosen it further. Already, USD and GBP have experienced pronounced weakness on speculation that their central banks won’t tighten monetary policy.
Fear and uncertainty tends to boost safe havens such as JPY, CHF and even gold has recovered some of its shine lately.
Nonetheless, strong short-covering rallies in equities – familiar bear market behaviour – will be mirrored in the forex markets by USD and risk currencies for the time being as they seem to act as sentiment indicators.
In other words, traders can expect some very choppy action over the next few months, meaning it will be easy to get shaken out of positions. This is likely to continue until the outlook becomes a little clearer, at which point some market trends might start to develop.
By Justin Pugsley, Markets Analyst MahiFX