Forex markets and especially sterling will likely be volatile as the week begins. As well, expect gains across all markets to slip, as optimism over the prospect of a Brexit deal between the UK and EU—touted by UK Prime Minister Boris Johnson late last week as a virtual certainty—fades, after the British Parliament deferred Saturday's vote in order to have more time to study the details.
As a result, Johnson was forced by law to request an extension from the EU, after repeatedly vowing he would not do this. European Council President Donald Tusk will discuss the request with EU leaders, while Johnson plans to try and push the deal through at his end.
With so much progress on the Brexit front occurring over the past few weeks, it’s of little surprise that the British Pound has been able to carve out space as the top performing G10 currency thus far in October. Gains across the board last week allowed the British Pound to further pad it’s already impressive run this month.
GBP/JPY is now the top-performing GBP-cross, having gained 5.28% through the close on Friday, October 18. GBP/USD is close behind, up by 4.95%, while GBP/CHF has rallied by 3.71%; three of the top four performing GBP-crosses in October are the safe haven crosses.
Aside from Brexit, British Pound Economic Data Proving Steady
The forex economic calendar will produce little waves for the GBP-crosses over the coming days, keeping market participants’ collective attention on the news wire for the latest Brexit deal updates. But in general, UK economic data has stabilized in recent weeks, after a strong run through the end of the summer.
WHAT HAPPENS TO THE BRITISH POUND: NO DEAL, HARD BREXIT
Under a no-deal, hard Brexit outcome, traders should expect further losses by the British Pound, with EURGBP likely to trade closer to parity (1.0000), GBP/JPY could trade towards 120.00, while GBP/USD could fall towards 1.1000 during the first 1-3-months of a no-deal, hard Brexit (keeping in mind that the European Central Bank and Federal Reserve would likely cut interest rates to prevent Brexit shocks from impacting either the Eurozone or US economies too significantly, thereby capping potential gains by the Euro and the US Dollar versus the British Pound).
WHAT HAPPENS TO THE BRITISH POUND: DEAL
Under an outcome that produces a Brexit deal, there may be further scope for recovery by the GBP-crosses. EUR/GBP is likely to trade closer towards 0.8300, GBP/JPY could trade towards 145.00, while GBP/USD could rally towards 1.3600 during the first 1-3-months of managed Brexit (keeping in mind that the European Central Bank and Federal Reserve would be less likely cut interest rates to prevent Brexit shocks from impacting either the Eurozone or US economies too significantly, thereby limiting potential losses by the Euro and the US Dollar versus the British Pound).
The positive momentum in the Euro continues to build with the currency seeing its third consecutive and largest weekly gain since June. With the currency breaking out of its 3-month downtrend channel, this further suggests to us that 1.0879 is the interim low.
Alongside this, given the recent close above the September 13th high at 1.1110, this raises scope for a move towards the 200DMA at 1.1210 with the 50% Fibonacci retracement of the 1.1570-1.0879 drop just ahead at 1.1224. That said, with the relative strength index edging towards the overbought territory, which in turn may see further upside begin to slow.
Much of the initial focus however, for major USD pairs will be on the historic Brexit vote over the weekend and given the binary nature of the vote, this will dictate the short-term direction for the pair. As such, if Boris Johnson were to fail in getting his deal through parliament, this could see EUR/USD fall below the 1.1100 handle eyeing a test of the 50DMA at 1.1036.
The forexfactory economic calendar this week is busy but with only a few top line releases for traders to look at. The release of the latest Federal Reserve Beige Book next Wednesday will probably be the most important event of the week in the forex market.
Taking a look at EURUSD’s daily chart, the first meaningful technical cue for a reversal was secured through Friday’s session. The pair clear the top of a descending channel that has guided the benchmark pair lower since it peaked in late June. That is appealing – as is the DXY Dollar Index’s slip which is the mirror of this chart – but there are more than a few technical barriers still immediately overheard. The 50-day moving average still stands at roughly 1.1050. The 38.2% Fibonacci retracement of the June to October bear wave is a little higher at 1.1080. And, we haven’t even set a new higher swing high. Each of this milestones may be reached ahead, but bullish conviction should be held loosely until some of these markers are passed.
When looking at EURUSD, there is a conflict between the belief that bearish gravity may have taken over because we have already traded at multi-year lows this month, but the tempered pace raises arguments that it is instead stretched. With regards to the hold below the 50-day moving average, Friday’s close increased the consecutive days that we have traded below the average to 61 trading sessions. That is the longest period of technical bearish course since July 2015 when the exchange rate was at the end of a record-breaking collapse. This slide is far more restrained in pace and that adds to the sense that a close above may be ‘overdue’. Then again, previous jumps above the charge pattern were short-lived.
Let’s look at three ways on how you would analyze and develop ideas to trade the market. There are three basic types of forex analysis:
There has always been a constant debate as to which forex analysis is better, but to tell you the truth, you need to know all three. It’s kind of like standing on a three-legged stool. If one of the legs is weak, the stool will break under your weight and you’ll fall flat on your face.
The same holds true in forex trading. If your forex analysis on any of the three types of trading is weak and you ignore it, there’s a good chance that it will cause you to lose out on your trade!
Technical analysis is the framework in which forex traders study price movement.
The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.
The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price.
If price reflects all the information that is out there, then price action is all one would really need to make a trade.
Now, have you ever heard the old adage, “History tends to repeat itself“?
Well, that’s basically what technical analysis is all about! If a price level held as key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.
Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price will act the same way that it did before.
In the world of currency trading, when someone says technical analysis, the first thing that comes to mind is a chart.
Technical analysts use candlestick charts because they are the easiest way to visualize historical data!
You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities.
What’s more is that with all the traders who rely on technical analysis out there, these candlestick patterns and indicator signals tend to become self-fulfilling.
As more and more forex traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets.
You should know though that technical analysis is VERY subjective.
Just because Ralph and Joseph are looking at the exact same currency chart setup or forex indicators doesn’t mean that they will come up with the same idea of where price may be headed.
The important thing is that you understand the concepts under technical forex analysis so you won’t get nosebleeds whenever somebody starts talking about Fibonacci retracement, Bollinger bands, moving averages, harmonic patterns or pivot points.
Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.
The best way to do this is to follow the news released on the forexfactory economic calendar.
If you think about it, this makes a whole lot of sense! Just like in your Economics 101 class, it is supply and demand that determines price, or in our case, the currency exchange rate.
Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.
In other words, you have to look at different factors to determine whose economy is rockin’ like a Taylor Swift song, and whose economy sucks.
You have to understand the reasons of why and how certain events like a decrease in the non-farm payrolls (NFP) affects a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen.
The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.
In a nutshell, this is what fundamental forex analysis is:
For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving.
As the economy gets better, raising interest rates may be needed to control growth and inflation.
Higher interest rates make dollar-denominated financial assets more attractive.
In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will likely increase.
Later on in the course, you will learn which economic data points tends to drive currency prices, and why they do so.
You will know who the Fed Chairman is and how retail sales data reflects the economy. You’ll be spitting out global interest rates like baseball statistics.
But for now, just know that fundamental analysis is a way of analyzing the potential moves of a currency through the strength or weakness of that country’s economic outlook. It’s going to be awesome, we promise!
Earlier, we said that price action should theoretically reflect all available market information. Unfortunately for us forex traders, it isn’t that simple.
The forex market do not simply reflect all of the information out there because traders will all just act the same way. Of course, that isn’t how things work.
This is why sentiment analysis is important. Each trader has his or her own opinion of why the market is acting the way it does and whether to trade in the same direction of the market or against it.
The market is just like Facebook – it’s a complex network made up of individuals who want to spam our news feeds.
Kidding aside, the market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market.
Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there.
The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the forex markets in your favor.
Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the GSs – George Soros or Goldman Sachs!).
As a trader, you have to take all this into consideration. You need to perform sentiment analysis.
It’s up to you to gauge how the market is feeling, whether it is bullish or bearish.
Then you have to decide how you want to incorporate your perception of market sentiment into your forex trading system.
If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss!
Being able to gauge market sentiment aka sentiment analysis can be an important tool in your toolbox.
Ahhhh, the million dollar question….
Throughout your journey as an aspiring forex trader you will find strong advocates for each type of forex analysis.
Do not be fooled by these one-sided extremists! One is not better than the other…they are all just different ways to look at the market.
At the end of the day, you should trade based on the type of forex analysis you are most comfortable and profitable with.
To recap, technical analysis is the study of currency price movement on the charts while fundamental analysis takes a look at how the country’s economy is doing.
Market sentiment analysis determines whether the market is bullish or bearish on the current or future fundamental outlook.
Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework to create our trade plans.
Those three work hand-in-hand-in-hand to help you come up with good forex trade ideas.