Federal Reserve Chairman, Ben Bernanke, yesterday announced that he is waiting for unemployment levels to drop to 6.5% before he will consider cutting the financial stimulus to the US economy. He said the economy is improving, but he is still not satisfied with the high unemployment rate of 7.6%. With Bernanke stepping down as Chairman in January, some commentators believe that he wants to begin the process of reducing the stimulus in advance of his successor taking over.
President Obama has also been highly complementary of Bernanke’s role in the recovery of the US economy, with most of the key data from the US showing improvement in recent weeks. The USD has strengthened in recent days as the market awaited the result from the Fed’s meeting.
The volatility between the USD/JPY pair has stabilized somewhat in recent days with only moderate volatility seen in the pair since 13 June. It is still too early to say whether the Bank of Japan’s (BOJ) stimulus is working as it is the USD’s influence that is driving the yen lower. BOJ Governor Kuroda last week mentioned that he may double the current level of stimulus – a threat that he has not yet acted on, but was still enough to cause the yen to drop. A weakened yen is good for the local economy as it boosts exports and attracts investors to the country; both important elements in helping the Japanese economy recover.
The Eurozone has also shown some glimmers of a recovery in recent weeks and the euro hit a four month high against the USD on Tuesday. The technical data suggests EUR/USD is overbought currently, trading around 1.3400, but the performance of this pair is dependent on any announcements from Bernanke.
The British pound also enjoyed a boost last week on the back of the positive Eurozone data. Although GBP/USD declined slightly this week, this was more to do with the US dollar driving the pound down than any specific negativity from the UK. German Chancellor Merkel has said she sees improvement in the Eurozone’s economy, but it still needs further work. If there is truth that the region is recovering slowly this could also be good news for the UK’s fortunes and for the long-term outlook for sterling.
The Australian dollar has taken a bit of a battering in the past few weeks and many traders have taken advantage of this volatility. The technical analysis suggests AUD/USD is currently overbought and so this will be a pair to watch closely for further developments. The Reserve Bank of Australia cut the interest rate last month from 3.00% to 2.75%, and this week they have indicated that there is still room to cut the rates further so as to boost the flagging economy.
The Australian dollar is also impacted by the price of gold, with a correlation often seen between the two. Gold has declined substantially this week, from a high of 1,392 US dollars an ounce on Friday 14 June, dropping to 1304 on Wednesday 19 June, which has undoubtedly had a negative effect on the Aussie. Gold has historically declined as the US dollar strengthens so it should be closely monitored for volatility.
Oil has also enjoyed a boost, rising in price from 94.28 US dollars a barrel on Tuesday 11 June to a high of 98.99 on Wednesday 19 June. This jump was attributed to the conflict in Syria and a boost in global demand, however, the price later declined to 96.21 on Thursday 20 June.
This period is a tough time for traders who prefer to execute a trading strategy based on fundamental data. Such traders may be wise to consider a strategy that also takes into account technical analysis and monitors the mid-long term indicators for any given pair.
What to watch this week:
The majors of EUR/USD, USD/JPY and GBP/USD offer the best trading opportunities this week. Watch out for an overbought euro and pay attention to the technical data to look for buy and sell indicators.
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This article was first published on 22nd June 2013