Now that the Federal Reserve’s rate hike announcement is behind us, it’s time to watch what will happen in other markets, particularly the Forex market, where the U.S. dollar will most likely see some short term impact as a result of the decision. Logic would stand to reason that a rate hike would drop the stock price of many companies, driving down the price of major indices. This, in turn, would increase the price of the dollar as there’s a moderate inverse correlation between the S&P 500 and the USD. And now that the Fed hike is done, European markets are even trading higher, which drives down the price of the euro, for the time being. The stage seems to be set to go long on the USD, and short on the euro.
As all experienced traders know, it’s never this easy, though. There’s no easy way to say how long this will go on for, or even how long it’s already taken hold over asset prices.
Technical indicators are still valid for short term trades, but in light of this major event, it’s hard to say how tough previously established support and resistance barriers will be to break through.
Through all of this, we need to remember that the European Central Bank is still in the midst of quantitative easing and their bond buyback program. This policy has not been as aggressive as many investors have wanted it to be, and that has hurt the euro quite a bit. Even when the majority of analysts thought it wasn’t nearly enough, ECB head Mario Draghi has been keeping the bond buyback steady at 60 billion euros per month. It will be interesting to see whether this stance changes now that the Fed is finally moving, but that remains to be seen for now.
Looking at the technical indicators, it’s easy to see that analysts are now even more bearish than they were. Despite the fact that a short term peak of 1.1050 is a strong possibility, and that some experts think the euro could climb as high as 1.1200, the longer term forecast is not quite as promising for the euro. The high points may be illusions, though, according to strength indices. As time goes forward, watch trader momentum and pay attention to what Forex traders are doing. Even if you are a binary options trader, their patterns play an important role in how you should act. In fact, they are extremely important simply because this is a primary mover of currency price.
SSI info looks like traders as a whole are pretty neutral. In the past, when traders are bearish, it can be smart to be a bull, and vice versa. However, in a position when trading is neutral in behavior, it’s best to look to what the long term fundamentals say. Right now, that’s to short the euro and go long on the U.S. dollar. There are just too many things going well for the dollar, and too many issues with the euro.
Finally, keep the concept of currency relativism in mind. This means that even when two currencies are struggling, the one that is struggling the least will prevail. The USD has its issues to be sure, but right now, it is in a position of relative strength, and if the euro keeps struggling, then the USD will keep its upper hand. This is something you need to keep in mind regardless of what the technical indicators say. As long as this imbalance remains, the dollar is the stronger of the two currencies.