When we look at activity in the forex markets, most of the attention this year has been focused on the US Dollar as the greenback has risen to new long-term highs against a broad number of world currencies. But forex traders will need to look at other areas of the forex market in order to gain a broader perspective on the space.
Recent developments in both the Euro and in the Swiss Franc suggest that we could still see some increased volatility in these pairs if central bank actions start to surprise market expectations. So it continues to be important for forex traders to have a strong sense of the factors that would impact valuations in the Euro and Swiss Franc.
Watching the ECB, SNB
Most of the bullish activity in the US Dollar this year has been propelled by the fact that the Federal Reserve is still the central bank that is most likely to start raising interest rates in an aggressive fashion. The labor market and stock valuations have stabilized in the US to the point that the Fed now has increased flexibility in terms of its ability to start changing monetary policy.
We still have not seen any increases in US interest rates but when we look at the changing policy outlook at both the European Central Bank (ECB) and the Swiss National Bank (SNB), some major divergences are starting to emerge. But the ECB and SNB have started to highlight the need for lower interest rates in order to create a means for economic growth as we head into next year.
This is not something that is being highlighted by the central bank in the US (the Fed), so this is something that could lead to additional losses in the EUR and CHF going forward. The Euro is the most closely watched currency of the two, so forex traders can start to look for changing price moves here in order to generate new trade ideas in the next few months. In terms of prices, it will be important to watch the psychological price levels at 1.05 and 1.00 in the EUR/USD. Any major breaks here will likely hit major stop losses and this is something that will often lead to increased volatility in the markets.
Forex traders should keep all of these factors in mind when structuring new trade ideas in pairs like the EUR/USD, USD/CHF, or even the EUR/CHF as these pairs will some of the most heavily impacted assets if we start to see changing central bank policy at the ECB and the SNB.