Forex markets currently appear to be driven by three main phenomena;
.Continual market talk of Fed tapering and the timing thereof.
.The sales of foreign assets by Japanese investors.
.The liquidity squeeze of China and the slowing of the world's second largest economy.
The market consensus, after Ben Bernanke gave his two days of testimony in front of various facets of the USA government last week, appeared to be no change to his previous week's FOMC statements – monetary easing will be aggressively pursued until the original 6.5% unemployment target (stated at the outset of the latest rounds of monetary easing) is finally reached.
Given that this will take the creation of approximately two million new jobs and take USA unemployment to pre Great Recession levels, the markets have translated this as potentially 18-24 months of further $85 billion quantitative easing/monetary stimulus, or until such time as the Fed announces tapering of the stimulus. The longer the tapering issue lingers, the more likely that the market correction will be sudden, as opposed to a gentle deflating of the current record levels witnessed by the DJIA and S&P 500. Just how sudden and by what percentage the main indices will fall is impossible to predict, but the closer we arrive to a tapering decision the greater the speculation will be. The Fed's massive portfolio/balance sheet now exceeds $3 trillion, the longer the policy lasts, the more likely it will end unhappily…
Savers, especially pensioners struggling to live on income from their investments, are cornered for safe options. They've been forced into equities/stocks, which is one reason the market has been rising parabolically. With borrowing costs low, Congress and the White House have less incentive to rein in the national debt, whilst ZIRP has distorted markets.
There are currently no definitive visions as to how the Fed plans to unload parts of their $3 trillion assets. As it does finally sell off the value of all bonds could plunge, wiping out the very marginal returns bond investors are receiving. The longer the Fed's easy-money policies continue, the greater the risk they're terminally distorting markets, creating new bubbles and setting the USA (and in turn the global economy) up for another crisis fall.
Major currency pair trend analysis
EUR/USD last reversed trend on July 9th – 10th and has maintained the current trajectory and momentum since. Analysing the most commonly used and preferred swing trading indicators would suggest that the current momentum has further ground to reclaim. PSAR is below price, the stochastics (on an adjusted setting of 9,9,5) are still yet to reverse/cross, or reach the overbought zone. The DMI (on an adjusted setting of 20) is printing higher highs on the histogram, whilst the MACD is also printing higher highs. The RSI reading (on the standard setting of a 14 day period) is currently above the median 50 level at 54.81. The Bollinger bands on standard settings are some distance from being breached. The price action using Heikin Ashi bars reveals closed candles during the previous days trading, with small shadows suggesting further upward momentum.
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Unless there is a major deviation this week in terms of unified central bank policy it would be reckless to misjudge or attempt to predict a sentiment shift. Therefore traders in long trend positions of EUR/USD would be advised to look for full or partial confirmation of many of the preferred indicators before considering a short position.
The first minutes of the UK Bank of England's monetary policy committee, after new governor Mark Carney took over the reins as the governor, were revealed last week. The post minutes' analysis suggested that fresh monetary stimulus is currently off the table. Similarly any adjustment to the current 0.5% base interest rate appears unlikely unless the UK begins to slip back into recession. Despite many analysts believing that Carney will begin an inevitable dove-tailing of policy with the USA, the overall message appeared to be one of controlled and systematic decision making, albeit proactive versus reactive. The effect on cable was predictable…
Similar to EUR/USD cable last reversed trend on July 9th – 10th. Since which date it has maintained a steady rise. The preferred set of the most commonly used trend indicators are all indicating positive for a continued rise. PSAR is below price, the DMI became positive (on an adjusted setting of 20) on July 18th and the histogram made higher highs on successive days. The MACD is positive with the histogram illustrating higher highs for five successive days. The stochastics (on 9,9,5) are short of the oversold zone and yet to cross, whilst the RSI is above the median line and reading 52.77. Over the last four successive trading days the Heikin Ashi candles were closed with upward shadows, indications that the overall market sentiment has remained bullish cable. Unless a reverse in sentiment is witnessed via the lagging indicators, or a major reversal in policy is revealed by the UK BoE or the USA Fed, or the markets experience a seismic shock, then swing/trend traders would be advised to stay long cable.
Dollar yen last experienced a trend reversal on July 10th. Since which time the latest bearish trend has been unconvincing. PSAR is above price, RSI is reading 56.95, the MACD is positive reaching higher highs, as is the DMI on an adjusted setting of 20. The middle Bollinger band has been penetrated in the upward momentum. The stochastic lines are narrowed on a revised setting of 9,9,5 but rendered neutral neither oversold or overbought zones appearing within reach. Trend traders who prefer using indicators to determine direction and who are currently short would be advised to wait for full confirmation of all the most commonly preferred indicators before reversing their position given that the current chart reading is unconvincing. The PSAR being below price and the stochastics crossing could be considered the necessary signals to finally go long.
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U.S. oil began its recent parabolic trend on June 25th. Oil breached $109 per barrel during last week's sessions and threatened to reach $110 per barrel. Heightened tensions regarding the situation in Egypt, putting pressure on the Suez canal and the SUMED's pipeline to continue unbroken supply. Unbroken supply questions affected sentiment as did many domestic questions in relation to current reserves in the USA. The last comparative weekly high was last witnessed in March 2012. The most commonly used indicators to plot swing trends are still reading positive regarding a continual upward momentum. However, a swing in sentiment as a result of geo political solutions being reached could cause a sell off in oil, as could further proof that the USA is genuinely in a position to become energy independent. PSAR, MACD, DMI, Bollinger bands, Heikin Ashi bars, stochastics are all positive. It must be taken on board that as a commodity oil often takes violent swings, therefore it would be advisable for traders (who have been long oil since the trend developed from late June) to manage their trailing stops effectively.
Gold has made a significant, albeit unconvincing, recovery over recent weeks since reversing trend on July 9th – 10th. As global markets have risen, as a consequence of the central banks unified agreement on momentary stimuli, the need for gold as a safe haven has reduced. However, the security has made positive gains over recent weeks.
Despite the bullish optimism gold has yet to trigger the full compliment of trend indicators, suggesting that many speculators and investors remain unconvinced with regards to the bullish momentum. Indeed several of the trend indicators on adjusted settings are indicating that this secular bullish movement may be exhausted. The stochastics are in the oversold zone, the DMI is yet to become positive, despite making higher lows on the adjusted 20 setting. The RSI has crossed the median level to be reading 55.3 whilst the upper Bollinger band has been breached. Overall gold appears primed for a break out. As to whether or not this will be to the upside is extremely difficult to predict. Therefore traders would be advised to remain vigilant if they're currently long gold by managing their stops and expectations.
The DJIA began its recent bullish move on June 26th. The rise has been circa 800 points. Despite the indicators suggesting potential exhaustion of the move market sentiment is entirely dependent on the narrative with regards to monetary stimulus, as opposed to positive earnings in the current reporting season, or other fundamental published news events.
The trend indicators suggesting an overbought market include the RSI reaching towards 70 and the stochastics being in the oversold zone and printing over 90 readings. The latest daily candles have been shallow with smaller shadows over recent sessions. The MACD has printed lower highs on the histogram. Traders currently long would be advised to monitor their trades with caution as the DJIA is exhibiting many signs that the record highs will fail to be breached and that the narrative concerning tapering of monetary easing has been priced in. The market could be scheduled for a significant retracement. Traders who are adept at using the Fibonacci tool could begin to consider the possibility for a major retracement.