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The forex trading week has come and gone. Time to take a look at the currencies and/or currency pairs that were on the move and what moved them. Were you able to profit from any of this week’s top movers?

Top Forex Weekly Movers (Oct. 19-Oct. 23)
Top Forex Weekly Movers (Oct. 19-Oct. 23)

Based on the above table, it seems like the theme for this trading week was U.S. dollar strength and weakness on the part of the euro and the Swiss franc. Forex price action was actually somewhat subdued for the first three days, but volatility exploded on Thursday and Friday. So, what caused the volatility explosion?

The ECB Press Conference

  • ECB maintains refinancing rate at 0.05% as expected
  • ECB maintains deposit rate at -0.2% as expected
  • Economic recovery expected to continue, albeit at a dampened pace
  • Risks to to euro area growth and inflation outlook remain on the downside
  • ECB willing to use all monetary policy instruments if needed, including rate cuts
  • Recent euro strength has negative impact on euro zone

The euro plunged across the board while U.S. dollar pairs were getting a lot of buyers during and after the ECB’s press conference. Forex Gump already made a more in-depth write-up on this event, so let me just give you the most basic points.

First of all, the most recent ECB press conference was rather dovish. In his introductory speech ECB President Mario Draghi said that “growth prospects in the emerging markets” and recent developments in the financial and commodities market “continue to signal downside risks to the outlook for growth and inflation.” As a result, “the degree of monetary policy accommodation will need to be re-examined at [the ECB’s] December monetary policy meeting,” which means that ECB officials are probably thinking about more easing moves – the kind of news that forex traders who are bullish on the euro don’t want to hear (but euro bears do).

In the same speech, Draghi said that the ECB Governing Council “is willing and able to act by using all the instruments available within its mandate if warranted.” And when he was asked during the Q&A portion on whether rate cuts were included, Draghi stated that rate cuts were not considered in earlier meetings, but “This time it was discussed. Further lowering of the deposit facility rate was indeed discussed.” So there you have it – more rate cuts are in the cards now, and another reason why forex traders dumped the euro.

Aside from the overall dovish tone, another major point which probably sparked the euro selloff was Draghi’s comment in the Q&A portion that “one of the downside risks to our inflation projections comes from the exchange rate,” which makes sense since a stronger euro makes euro zone exports less competitive while imports become cheaper, and cheaper goods means lower inflation levels.

The Surprise Chinese Rate Cut

  • PBoC cuts one-year lending rate by 25 bps to 4.35%
  • PBoC cuts deposit rate by 25 bps to 1.50%
  • PBoC cuts reserve ratio by 50 bps
  • Deposit rate ceiling removed for banks
  • PBoC: “there is some room for reducing the benchmark interest rate”

As I noted in Friday’s London session forex recap, the comdolls, particularly the Aussie, were getting some buyers shortly after the rate cut was announced. After all, the Google-translated statement from People’s Bank of China (PBoC) claims that the purpose of the rate cut was “to maintain reasonably adequate liquidity in the banking system, guide steady moderate growth of money and credit,” which, if you believe PBoC’s statement, is good for Australia’s faltering commodity exports industry down the road.

Ultimately, however, it was the U.S. dollar that was the main beneficiary of the surprise Chinese rate cut. The most likely reason for this is capital flow due to monetary policy divergence.

In more simpler terms that forex newbies can hopefully understand, the U.S. Fed and (arguably) the Bank of England are the only central banks who are still open to hiking rates, with the U.S. Fed  being the only one that could potentially hike rates within this year. All other central banks are in easy-money mode, and the ECB already showed its dovish hand during the previously discussed press conference. The PBoC meanwhile, showed forex traders its easy-money membership card this week when it announced in a separate statement that “there is some room for reducing the benchmark interest rate.” This probably caused many forex traders, especially the interest rate junkies, to load up on the Greenback in the hopes that some good news will be had in next week’s FOMC statement.

As a side note, risk appetite was making a comeback, thanks to both the ECB press conference and the Chinese rate cut. As a direct consequence, demand for the safe haven currencies, especially the Swissy got dampened, which is probably why the Swissy had a bad week overall, although I suspect the Swiss National Bank was probably weakening the Swissy again.

Do you think these catalysts were enough to spark longer-term forex trends or did they just cause a knee-jerk reaction? Better keep these market themes in mind when planning your trades for next week!