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After a slow start this 2014, the forex industry continued to post lackluster trading volumes for most of Q2. What in the world is going on?

CFTC’s April FCM (futures commission merchants) data revealed that U.S. retail account levels slumped by $8.7 million, marking a considerable decline in the size of the overall forex industry. LeapRate’s retail forex volume metrics for the same month plummeted by 6% to an average daily trading volume of $281 million while volumes for institutional brokers as reported by Thomson Reuters Matching and KCG Hotspot marked double-digit declines.

The month of May painted an even bleaker picture, as the closing down of forex brokers FXDD and ILQ was reflected in U.S. trading volumes. “There’s simply no substitute for volatility among retail traders. Without it, clients pull back from trading,” noted LeapRate Managing Director Gerald Segal as he provided an additional explanation for the continued slide in trading volumes.

Higher volatility and stronger volumes ahead?
Higher volatility and stronger volumes ahead?

On a brighter note, June saw a slight rebound in forex trading activity, with the CME Group reporting record high volumes in pound futures trading. CME added that it is seeing the highest average daily trading volume for the British pound since May 2010, with open interest showing a 41% annualized gain.

A quick review of market-moving economic events in the past few weeks shows that price action did pick up in June, spurred mostly by clearer monetary policy biases among major central banks. BOE rate hike expectations put the spotlight on the pound, as Carney kept reiterating that the U.K. central bank might start tightening before the end of the year, thanks to the sustained recovery in the British economy and the surge in house prices.

Euro pairs also saw an increase in volatility, as the ECB emphasized their commitment to keep stimulus in place by cutting several interest rates and laying down their plans for targeted LTRO for September and December. Meanwhile, the Fed’s reluctance to give a time line for rate hikes led many to believe that the U.S. economy could continue to enjoy monetary policy support, leading to a return of risk appetite and a safe-haven dollar selloff.

In a nutshell, monetary policy expectations have been one of the biggest driving forces in price action towards the end of Q2, leading to a rebound in volatility and forex trading volumes. Risk sentiment has also come into play, with several market participants feeling hopeful that easy monetary policy could help sustain the green shoots in the global economy.