Submitted by Sara Patterson from DailyForex.com
Disclaimer: The author’s views are entirely his or her own and may not reflect the views of innerfx.com
With the second quarter rapidly approaching, now is a good time forecast what is likely to happen in the Forex markets in Q2 2011. There are far too many people that lose money reacting after the fact, and not looking into the future. Although these market forecasts are purely speculative, I hope they’ll give you something to think about in the approaching months as you test the markets with your own online Forex brokers.
No forecast would be complete without the EUR/USD. When we look at the pair, you can see that confusion (with a slightly bearish bias) has been the overall theme for the past two years. However, each correction in the pair has been absolutely brutal. This is a danger that you may see continued during the course of Q2.
For the majority of the quarter however, expect to see the pair rise. The pullbacks will be as a result of political uncertainty in the Middle East, and the flight to safety trade of buying USD. (In fact, this is the biggest concern at the time of writing.) These moves in general should be short-term in nature. The general direction for this pair will certainly be upwards, as the ECB has recently come out and publicly stated their intentions of a rate hike in April.
The real question will be about the wording of the statement in April, and if it suggests further tightening. The statement following the announcement could very well be the most important thing to pay attention to during the entire quarter. Further adding to the importance of the statement is the fact that the Fed has been very public about keeping monetary policy loose for the foreseeable future. It appears that this currency pair is about to return to trading with the interest rate differentials. It’s about time, as this is the “norm” that we have been missing in the FX markets for 2 years. The pair should see 1.45 by the end of Q2, and possibly even the 1.50 handle.
The British economy, like its American counterpart, is sluggish at best, and really isn’t calling for a rate hike at all. However, this pair will typically reflect the risk-taking attitudes of the trading world. As traders feel more confident, the British pound tends to appreciate against the US dollar. With the global economy appearing to perk up, this pair will probably find an indirect bid over the quarter, but not necessarily because of any love for the Pound.
Over the last few years, we have seen this pair fall apart and return as high as the 1.70 handle. With the current environment in play, we are slowly marching towards the 1.70 mark presently. There seems to be no real reason to doubt that the trend will continue, albeit very slowly. The expected range of the GBP/USD during the quarter should be 1.62-1.66, with very choppy conditions as neither currency is particularly loved.
With the US dollar falling everywhere, it is no real surprise that the Japanese yen has been so strong against it. However, this pair tends to follow global risk as well. Because of this, we are starting to see an attempt at finding a bottom in this pair around the 82 handle. Currently the pair is consolidating, and trying to figure out its next move.
The next move should be rather explosive, and there is a possibility of a bearish flag forming. At the time of writing, this isn’t confirmed, but it is still a possibility. However, as the world recovers, money will typically flow out of Japan, and this might be the saving grace of this pair. Also, any serious break down in this pair would probably be fought by the Bank of Japan, who has no qualms about intervening. This wouldn’t reverse the direction, but hurt a lot of traders and slow down the drop. In reality, this pair looks like it will continue to consolidate around the 82 handle. Expected range will between 81 and 84 until the market finally decides where it wants to go. Odds are it won’t decide until after Q2 however.