Although previous predictions estimated that the United States dollar would rally against a notably weak euro, the exact opposite seems to be coming to pass in the month ahead. Analysts now estimate that the euro and the pound are going to experience a strong bullish stance in comparison to its Transatlantic counterpart. There are several metrics which have caused some Forex trading experts to reverse a position that was taken only a handful of weeks ago. What are some of the fundamental factors behind such a paradigm shift and more importantly, what can we expect in regards to currency trades during the next few weeks?
Historical and Seasonal Trends
We should first recognise that part of the reason behind a bearish dollar is associated with historical trends. For example, it has been shown that the S&P 500 generally experiences poor levels of performance in September. Another metric to mention is that as traders are now returning from their holidays, they will be reassessing the indicators within other benchmark sectors such as precious metals and commodities in general. Should these have lost ground on the open markets, the dollar will inevitably be affected in a negative manner.
A Look at Gold
As we have just mentioned, the price of gold will weigh upon the dollar. This must be examined from a longitudinal point of view. September 2016 is predicted to be a neutral month in terms of the performance of gold. As this metal has lost ground between 2011 and 2015, any short-term rally will be offset by such poor historical readings (1). Although any gains could be significant from a profitability point of view, the fact of the matter is that changes in its dollar value are thought to be minimal.
Technology and Housing Bubbles
While much of the attention within the Forex industry has been focused towards the comparatively flagging economic data emerging from China, the figures produced by the United States may be just as troubling. In particular, it is thought that the domestic technology and housing sectors are highly overpriced after having experienced massive gains during the past few years. This has left some investors wondering whether we may experience a repeat of the losses incurred between 2007 and 2010. It is yet to be seen whether or not this is the case. Nonetheless, those who are wary of any emerging economic data may choose to diversify their currency holdings away from the dollar.
The Looming Interest Rate Hike
The United States Federal Reserve has strongly hinted that a rate hike may be in order for September. This will primarily depend upon domestic employment data. Any surge of more than 200,000 jobs is said to provide the Fed with a reason to raise interest rates before December (2). The concern here is that early figures have shown that employment within the manufacturing sector has fallen. Gains were primarily seen in the services sector. Although this may not sound overly important, any fall in manufacturing jobs could signal a slowdown in terms of production. Conservative Forex traders could take this as a signal to return to other currencies.
The Ongoing Impact of the Brexit?
After much fanfare, it seems (currently) that the Brexit has not economically impacted the United Kingdom as much as some had expected. This has caused a return to the British currency markets. This is indeed an unprecedented event and it is yet to be seen whether or not the Brexit will play a strong role. What is more important to note is that historically, GBP/USD ratios have been bullish 65 per cent of the time over the past 20 years (1). There is little to indicate that this will drastically change and longitudinal Forex traders will likely keep in line with past investment strategies.
As is common within the Forex markets, what may have been fact yesterday could be proven wrong tomorrow. This is the main reason why it is critical to stay ahead of any late-breaking news with the help of CMC Markets. On-the-fly changes can then be made when the time is right.