We are at the end of the first half of 2019 and we are still into the depressed volatility environment that Fx pairs have been stuck in for months. Increased uncertainty on several fronts globally, higher presence of algorithmic trading in markets and monetary policy convergence among the major central banks have been among the main factors for the record low volatility and unseen narrow ranges in the Forex market.
Subdued volatility can end suddenly – Traders should be ready for large moves
However, the subdued volatility won’t last forever, probably. In fact, we are already seeing some larger moves unfolding primarily in Gold and other precious metals as well as the Dollar. The US Federal Reserve has completely reversed their course from a tightening bias to now an easing bias which has been the cause of the recent Dollar moves.
These narrow Fx ranges over the past year that we are currently still experiencing are in a way consolidation of the large moves that were seen in the Forex market during the period of 2014 – 2016 and even 2013 and 2012 (in JPY pairs mainly). Consolidations naturally follow after strong moves, and this perfectly fits the larger scale picture for the Dollar and other Forex pairs. Nonetheless, low volatility usually means that more turbulent times are coming in a particular market, so traders should better prepare for large moves in the future.
Global geopolitical issues have also weighed on risk sentiment
Over the past 12 months or so, the market has been confused and is still confused in many aspects about which direction macro fundamentals will move. Will interest rates keep rising? Will QE work or it’s just a failed experiment and central banks will start massive monetary easing again? What will happen with Brexit? What will happen with Trump and his trade wars? Also, what will happen with the rise of populism and far-right politicians globally and particularly in Europe?
All these questions are weighing on sentiment and hurting risk appetite to some extent. Depending on their resolutions, the final impact could move the macro fundamentals in different directions and subsequently, that will move currencies in a particular direction accordingly.
Central banks are at a pivotal point also
The US central bank, the Federal Reserve, recently signaled that it is preparing to cut interest rates this year to fight the economic slowdown. Other central banks also signaled the same, with the European Central Bank being the other major player to do so.
For the second half of the year, the most important question is not whether the major economies have slowed down and whether central banks will ease, but by how much? - Is a major crisis ahead of us or is this going to be just a small slowdown within a bull market? Will the Fed (and other central banks) cut rates only a few times or proceed with another round of massive money printing via quantitative easing or similar operations?
The answers will have major implications for currencies and other asset classes. Currencies are not a one-sided story. So, whether the Dollar rises or falls from here will also depend very much on the performance of other currencies and what other major central banks are doing with monetary policy. Ultimately, the Dollar looks poised for a decline from these levels as the Fed has much more room to provide stimulus than the ECB or the BOJ.
Stay tuned for our analysis next week, where we will take a deeper look at some more specific fundamental factors and the technicals that will affect the three most traded major pairs in the second half of 2019.
Gold Is Benefiting When Currencies Look Unattractive
Gold has skyrocketed as a result of major central banks reverting back to loose monetary policy and very likely also money printing in the near future. Gold broke above the 2016 highs recently and now trades above the $1400 level, which in itself carries huge implications.
Gold outlook is strongly bullish at the moment
The outlook for Gold has shifted to strongly bullish. The price action of the recent bull trend indicates strong momentum that has more fuel to run higher. Many global uncertainties such as Brexit and Trump’s trade wars, as well as central banks switching to easing mode have attracted more buyers for Gold and safe haven assets. As the ultimate safe haven asset, it’s not surprising that Gold prices are rising in a time when all major currencies are losing value due to economic uncertainty and stimulative monetary policy.
Technically, there is strong resistance in the $1500 area. From the current perspective, this area is very likely to be reached within the next few months as there is no resistance before it and the bullish trend is strong enough to extend higher toward it. Above that, more fuel will be needed to break this resistance, which can only be provided via the fundamentals as discussed below.
What ultimately will matter for Gold in the months ahead?
In the end, the main questions that we outlined earlier in this article will also affect Gold and determine the final outcome – either a strong extension of this bull trend or an end to in a few months time. If major downturns in the economy are ahead of us and central banks need to ease massively again then Gold can rise to new all-time highs.
But, if the economic slowdown proves to be more modest, the expansion continues and central banks don’t have to provide powerful monetary stimulus, or even go back to tightening and rate hikes again then the Gold rally is likely to be modest also and even completely reverse.
Finally, be sure to tune in here next week to read our 2019 H2 outlook on EURUSD, GBPUSD, and USDJPY.
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