Forex Update: The Week Behind, the Week Ahead

Traders and economists often have differing views about currency movements. Most traders, like myself, go with the flow of the market, hitching onto the present, participating in the seemingly illogical game of speculation, and not wasting time questioning over whether a particular currency should actually be going higher or lower against another currency. Some economists and non-traders, on the other hand, get angry when a currency keeps going against its assumed “logical” direction and argue that traders are so wrong in believing otherwise. This difference in thinking has stood out prominently over the past few weeks, especially since the US dollar has been rallying so strongly against most other major currencies.o

The past week marked another milestone in forex trading: The US dollar rose to a 6-month high against both the Euro and Swiss franc; it rose to a 7.5-month high versus the Japanese yen, and advanced to a near 2-year high against the British pound.

The most remarkable show of USD strength was seen against the battered Pound: GBP/USD fell for the 11th consecutive day on Friday, and that was the longest period of losses since at least January 1971. It was so long ago that the UK had not even joined the European Economic Community (now known as the EU) then.

As I wrote in a post last week, market players are now more concerned about slowing economies in the Euro-area and the United Kingdom, rather than on the current weak state of the US economy which still appears to have stagnated, thus there is more enthusiasm on USD bulls’ part to short other currencies against the dollar. You can argue all about how bad or terrible the US economy is or that latest US economic data is not actually that great and dig out statistical reports to prove how bad things really are in the US - but, can you fight the market sentiment and market momentum? Can you fight how things are playing out in the markets?

Meanwhile in the futures market, the latest COT report showed that the number of net short Euro contracts held by large speculators rose to 19,427, the highest since 29 April 2008. So if Euro economic data surprises on the upside this week, we could see a Euro rebound.

With the dollar’s mighty rise, crude oil prices have fallen below $114 a barrel on Friday. However, the US dollar could retrace some of its gains this coming week if oil rebounds.

It’s incredible how steep GBP/USD’s fall has been. Just a month ago, GBP/USD stood around 2.0100, but last Friday, the currency pair touched an intraday low of 1.8510. There could be some short profit-taking action for the pair next week, so a rebound can’t be ruled out.

As for EUR/USD, if weakness persists through 1.4640, the pair could target 1.4580, then possibly 1.4520.

In the stock markets, earnings reports from Target (TGT), Home Depot (HD) and Hewlett Packard (HPQ) will be eagerly anticipated this coming week.

Economic Calendar For Monday:

Bank of Japan rate decision

Swiss retail sales 0715 GMT

Eurozone trade balance 0900 GMT