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Forex Week in Review: October 12, 2018

October 12, 2018 16:00

Forex week in reviewThe past week has been a steady one for the currency markets, with the exception of some USD crosses. Both the US and Canada had bank holidays on Monday in observance of Thanksgiving (Canada) and Columbus Day (US), so the start of the week was weak in terms of volatility. This led to a weak start to major sessions, but volatility soon resumed.

Scroll down for a recap of major moves this week and potential trading opportunities based on sentiment, technical and fundamental analysis.

GBP/USD

The major release for the GBP currency pairs was the UK's August GDP data, which measures the change in the total gross value added (GVA) of all goods and services produced by the economy. It is the broadest measure of economic activity and the primary gauge of the economy's health. Although the GDP data was worse than expected, this was followed by a slightly more positive revision, which led to a the GBP climbing against the USD after its former drop. Additionally, on Thursday October 11 the UK PM Theresa May informed her cabinet that the expected Brexit deal is close, along with the Irish backstop moving towards being settled.

However, a Brexit deal doesn't mean it's smooth sailing for the GBP from here - the UK needs good CPI numbers too, as they need to forge new trade agreements with their trading partners. This could be positive or negative for the currency and the economy, with the possibility of these deals leading to either winning new business, or losing existing business. It's hard to predict the outcome at this stage, particularly when it comes to the economy's finance and service sector. If the UK loses business, then they may be forced to keep interest rates low, which could see the GBP dropping as the economy slows down.

Source: GBP/USD Admiral Markets MT5 with MT5SE Add-on - Accessed: 12.10.2018 10:20 AM

Source: GBP/USD Admiral Markets MT5 with MT5SE Add-on - Accessed: 12.10.2018 12:50 AM

The price opened at the Pivot Point and quickly broke through the retracement trend line (blue). The run was capped at R2 Admiral Pivot resistance. Traders could have traded a standard price action setup that happens at the break of a retracement trend line.

EUR/USD

The USD weakness led to a nice spike on the EUR/USD currency pair, the popular "Fiber". The price action hasn't been a surprise as we can see a clear rejection from the S1 pivot point along with the ascending trend line (green). Traders could have entered a trade either from S1 support or after the blue retracement trend line had been broken.

Source: EUR/USD Admiral Markets MT5 with MT5SE Add-on - Accessed: 12.10.2018 12:55 AM

Source: EUR/USD Admiral Markets MT5 with MT5SE Add-on - Accessed: 12.10.2018 12:55 AM

USD/JPY

The USD/JPY currency pair was trading at monthly lows this week as it hit stops below 112.00 and ate into gains made on October 11. This ha been a consistent theme this year, with the pair disconnecting from many of its correlations. One spot of trouble is the bond market, especially the yield curve. The 2-10 spread is down to its lows, which has some market-watchers spooked.

This means long-dated bonds are getting closer to short-dated bonds, and interest rates may be stagnant in future. The flattening yield curve indicates that the pair is not as strong, or not as in demand, as one would expect. Lower long-term bond yields then creates weaker competition for returns, causing investors to choose equities instead in an asset allocation shift.

Source: USD/JPY Admiral Markets MT5 with MT5SE Add-on - Accessed: 12.10.2018 13:10 AM

Source: USD/JPY Admiral Markets MT5 with MT5SE Add-on - Accessed: 12.10.2018 13:12 AM

Given that most of the Yen pairs have been in either a range or downtrend, what does this mean? The JPY is a 'safe haven' currency, meaning that normally traders trade it when there are signs of either strength or weakness in the currency. The JPY is connected to risk-on and risk-off sentiments in risky asset classes like Equities and to a certain degree Commodities. The JPY, as a result, carries a fair degree of volatility, which makes Yen pairs a good trading options in these markets.

Often traders will also perform Yen carry trades due to the low interest rates in Japan, which adds further to the volatility of this pair. Yen carry trades can then be transferred into risky asset trades. For example, when equities are rising in the US, investors can borrow funds in Yen and convert them to US dollars to buy US stocks, causing the USD/JPY currency pair to rise (along with rising US equities). Conversely, the opposite applies during de-risking in equities - funds are repatriated to Yen, causing Yen to strengthen.

This dynamic has best been reflected in recent movements in the USD/JPY. A strong drop below the S1 support made a quick consolidation between S2 and S1 pivots. After some consolidation and range bound price action, the volatility started to rise and the price dropped to S3 pivot. Traders could have taken a short entry at the break of a trend line or straight down from the S1 after the bearish emerging pattern showed on the chart (engulfer).

We hope that you managed to take advantage of some of these opportunities. But even if you haven't, rest assured that the market is always waiting for you.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.


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