We can say the trading week is only about to start even though it is always Wednesday. The reason for that? No less than three major central banks will profoundly influence prices in the next 48 hours, so no one took a chance of making a bold move ahead of these events.
A Central Banks’ Game
Every trader knows by now that trading is a game of probabilities, or chances. A pattern recognition approach ruled by a robust money management system can get you a long way in trading the Forex market.
Lately, the probabilities were heavily influenced by central bank planning. Ever since the Fed introduced the forward guidance principle, the market’s behavior changed.
Moreover, the ongoing rise in the crypto-currency markets made things even worse for Forex traders. As volatility is merely the sum of demand and supply imbalances, when the two decline, volatility disappears.
Therefore, it is normal to see retail Forex traders fleeing to the crypto market in a trend that is likely to continue. They like the risk and the volatility, even though the chances to make it are almost null for most of them.
Coming back to the Forex retail market, this one was only about 6% of the overall daily turnover. It means the crypto influence in the whole Forex market is negligible, to say the least, and this says much about the fears that the Forex market ranges because of the capital fleeing into cryptocurrencies.
Instead, the ones to blame for the recent slowdown in price action are the central banks. However, if you look historically at November and December, things aren’t out of ordinary as many would like to think.
The Fed will conclude its two days meeting today with a highly expected rate hike. Everyone looks for a hike, but the market’s reaction is a big unknown.
So many other variables in the United States, like the tax plan, will shape the way the dollar will trade forward.
If anything, the Fed’s hike will be just another reason for the ECB to be hawkish. Tomorrow’s ECB meeting will likely to be a non-event, but the European bank will have to recognize the stronger than usual GDP and the rise in the HICP. Core inflation may stall, but it is just a matter of time until it’ll pop higher.
The Bank of England faces a tough call: with inflation on the rise; it has a difficult time being hawkish with the Brexit bill being so elevated.
Ahead of a U.S. Dollar drove event, Euro crosses should perform better. They have the advantage of avoiding the eventual dollar’s volatility while benefiting from the ECB potential hawkishness. Out of all Euro crosses, the focus should stay with the EURJPY and the EURGBP for a new leg higher.
Also published on Medium.