subject: Where Next for the Forex Markets after more Quantitative Easing? [print this page] Where Next for the Forex Markets after more Quantitative Easing?
The decision by the US Federal Reserve to inject the US economy with an additional $600bn over the next few months caused asset prices to surge with stock market prices rising around the world. The UK's FTSE 100 hit 52 week highs, and, in the US, the Dow and S&P 500 also hit 52 week highs. Not surprisingly, the US Dollar slumped.
According to a recent CMC Markets report, "The US Dollar Index has slumped below trend line support around 76.10 from the March 2008 lows of 70.70. It looks to be heading for the 2009 lows around 74.15/20. The Index could find some support around the 75.60 level, however if it closes below 76.00 on a weekly close the pressure will increase for a move towards 74.15/20.
"The Euro has continued to gain on the back of the weakening US Dollar and has pushed above its recent highs towards the $1.4370 level. This is a 76.4% Fibonacci retracement level of the decline from the 2009 highs at $1.5140 to this year's lows at $1.1880. Note that there is also trend line resistance at $1.4520 from the 2008 and the all time highs at $1.6040. These could easily come into play if the Euro continues its rise."
If you're trading the forex markets then note that it's not just the Euro/Dollar market that's looking interesting, a report by Financial Spreads recently looked at the medium term trend of the US currency. "The US Dollar has been sold across the board. The Euro is looking impressive and the same goes for Sterling" it said.
"Both the Euro/Dollar and Sterling/Dollar rates are looking very comfortable above the $1.4000 and $1.6000 levels respectively. Until recently it looked doubtful they'd be able to hold onto this ground. Also the Australian Dollar/US Dollar rate is sitting comfortably above the parity level. It's hard to believe that this rate was at $0.6000 at the beginning of 2009."
Given the rise in the Euro, the European Central Bank (ECB) now has quite a big problem on their hands. A lot of the smaller European countries need a weaker Euro to help them stimulate some growth and deal with their debt problems. The strains are already beginning to show as Greece, Ireland and Portugal struggle to set budgets for 2011. Their bond yields have surged after EU leaders agreed to allow debt restructuring after 2013 for the countries that don't comply with EU fiscal regulations.
As always, ECB president Jean-Claude Trichet will have to continue to balance the competing dynamics of a buoyant German economy and the struggling periphery countries. On top of this Trichet is facing some difficult questions regarding the withdrawal of emergency support from the smaller European countries.
Russia has already stated that it will no longer buy Irish or Spanish bonds and this could be a sign of things to come. If the current program of the slow withdrawal of emergency measures continues then the consequences for the smaller European nations could be very serious indeed. The Euro may be riding high but if European Sovereign debt problems come to the fore then the Dollar might start to look more tempting.
With financial spread betting you can lose more than you initially invested. Financial spread betting carries a high level of risk to your capital. Ensure that spread betting matches your investment objectives. Familiarise yourself with the risks involved. Where necessary, seek independent advice.
