The US dollar has been strengthening across most of the majors as optimism has flooded the market amidst growing speculation that the US Federal Reserve will trim the stimulus back as early as September this year. The market will be closely watching for further policy indications when Fed Chairman Ben Bernanke speaks on Wednesday, the same day as the minutes from the June meeting of the Fed are due to be released.
While the long term trend is for USD strength, it’s not all good news for the Greenback as, when the time does come to reduce the stimulus, it is likely that we will see a decline in the currency until the market re-balances.
The Japanese yen continues to weaken, pushed down even further by the USD strength, and many market participants are asking how low it can go – JPY has dropped 21% against the USD and 25% against EUR in the last 12 months. Analysts are forecasting the yen may weaken to 103 in the next few weeks and, if this psychological level is eclipsed, we may see further yen weakness to the level of 110 by the end of the year.
The euro has shown some strength against the USD in recent weeks as economic news indicated the Eurozone economy may be slowly recovering. However, fears that the economic situation in Portugal is worsening and USD strength have somewhat halted the recovery of the euro. EUR/JPY is an interesting pair to watch now as the Eurozone and Japanese economies are both battling to recover. The Japanese economy seems to be strengthening faster than the Eurozone and we may see some volatility as they battle for supremacy.
The Australian dollar has been trading at nearly its lowest level in three years and there is speculation that the Reserve Bank of Australia may cut interest rates as early as next month. Interest rates are already at a record low of 2.75% and a further reduction will be another sign the Australian economy is struggling. Australia is being held somewhat hostage to the fortunes of the Chinese economy which has also shown weakness recently.
While the British pound hit a four month low on Monday in response to heavy selling pressure as traders looked to buy USD, it rebutted on Tuesday with manufacturing and industrial production data showing modest month on month increases. This is another small sign the UK economy is in recovery, although new Bank of England Governor Carney’s statement last week that there are no immediate plans to raise interest rates may curb optimism in Sterling.
The long term trend for gold is still negative and many traders are asking themselves just how low gold can go. Some analysts are predicting it may go as low as $1120 an ounce before the end of the year. However there is a glimmer of hope within the negative overall trend as, even when the gold price is dropping overall, it usually displays volatile movements both up and down. In the past week we have seen gold strengthen from a low of $1208 an ounce on Friday 5 July to $1260 on Tuesday 9 July. We may also see volatility from the precious metal when the US stimulus is trimmed. While long term traders are still focusing on selling gold now, shorter term traders can look to take advantage of short term volatility.
Oil prices have been boosted by a global oil demand off the back of fears that the Egypt political crisis may spread to neighbouring oil producing countries. Oil prices rose from $100.96 a barrel on Friday 5 July to a new high on Monday 8 July of 103.75 with further price rises not unlikely.
What to watch this week:
GBP/USD, USD/JPY and EUR/JPY are the key pairs to watch for opportunities off the back of volatility. Traders should also closely watch the progress of AUD/USD which is likely to continue to experience fluctuations in the coming days and weeks.
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