Heads up, forex fellas! The strong trends that we saw in the past few months might slow down towards the last stretch of the year, thanks to these three market factors.
1. Shift in monetary policy biases?
While clear monetary policy biases spurred predictable forex market trends in Q3 2014, these moves might be too good to last as some major central banks are starting to have second thoughts.
For one, the Fed seemed to backpedal on its plans to start tightening sometime next year, as dovish policymakers focused on the roadblocks to recovery during the latest FOMC meeting. BOE officials also wavered on their hawkish stance, as their October rate statement reflected concerns about a looming euro zone recession and its potential negative impact on the U.K. economy.
Meanwhile, the BOJ is still refusing to give in to additional easing, despite a continuous stream of weak economic data from Japan. Policymakers seem to be counting on a strong rebound for the Q3 figures, which might confirm that further stimulus is no longer necessary. In that case, yen pairs might no longer be able to sustain their climb!
2. Holiday season comin’ up!
Another factor that could lead forex trends to hit the brakes is the December holiday season. After all, traders might want to book their profits and close all positions before heading off to enjoy Thanksgiving and Christmas holidays.
With that, liquidity is expected to be thinner in the last couple of months of the year, paving the way for weaker trends. In addition, as I’ve mentioned in my latest CFTC COT Positioning Update, trends appear to be overdone as positioning for some currencies are approaching record levels. Lower volumes and a downturn in trading activity might be seen, as profit-taking among both retail and institutional traders might dictate price action before 2014 comes to a close.
3. Increased risks and uncertainties
As we’ve witnessed in the past, a higher degree of market uncertainty tends to convince most traders to sit on the sidelines instead of piling on their forex positions. Investors are more cautious and less inclined to commit to a particular bias, which makes it more difficult for forex trends to carry on.
In the past few weeks, concerns about the worsening Ebola outbreak seems to be taking its toll on risk appetite, as more world leaders have spoken about its international repercussions. It doesn’t help that geopolitical tension is still present in the Asian region, as the protests in Hong Kong continue to escalate.
While a continuation of the previous forex trends seems unlikely to take place until next year, don’t dismiss the possibility of seeing one last push for some currency pairs. For instance, the euro still carries a very bearish fundamental bias, thanks to negative deposit rates and the possibility of actual QE from the ECB.
What about you? Do you think that forex trends will carry on this Q4 or will we see a return to range-bound price action? Don’t be shy to share your thoughts in our comments section!