Now that the lazy summer days are over, traders might be returning back to their desks to catch the remaining forex market moves towards the end of the year. Is volatility likely to pick up starting this month?
You see, market liquidity tends to get dried up in the summer months of June to August, which in turn affects volatility. With fewer participants in the market, forex pairs tend to stay in range as trading volumes aren’t enough to push them in a clearer and sustained direction.
While the forex market appears to have been off to a slow start this year and trading volumes sank in periods of increased market uncertainty, it looks like volatility has been picking up again since August. A quick review of the forex charts reveals that key support or resistance zones have recently been broken among several pairs, such as EUR/USD breaching the 1.3350 long-term area of interest or USD/JPY surging past the 103.00 major resistance zone.
In fact, some industry analysts have noted that the return of volatility started a little earlier than usual this year, as some central banks have expressed clearer policy biases in the past quarter. For one, the ECB decided to cut several interest rates and announced additional targeted LTRO back in June while the RBNZ went on its rate hike spree. Last month, the testimonies during the Jackson Hole Summit shed more light on what the Fed and the BOJ have in mind.
Apart from monetary policy, changes in risk appetite have also revived market activity in the past few weeks. The impact of geopolitical tensions on sentiment appears to have faded, as risk-taking has pushed equity indices like the S&P 500 to new highs in August.
I’m sure you’re wondering “Will the early pickup in volatility soon be over or is the market just warming up?” and so am I!
As always, this depends on what the market has up its sleeve for the last few months of the year. This week’s set of monetary policy statements could play a crucial role in determining how certain currencies might behave until the end of 2014 or early next year. Do you see any clear trends materializing? Don’t hesitate to share your thoughts in our comment box!