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A New FX Risk That Trumps All Others

By Boris Schlossberg
27 August 2013 13:04 GMT

The crisis unfolding in Syria is an unforeseen geopolitical risk that has cast a shadow over world currency and equity markets, causing renewed risk aversion and forcing economic data to take a back seat.

Jitters over the growing escalation of rhetoric regarding the situation in Syria pressured high-beta currencies in Asian and early-European trade today, sending AUDUSD below the .8950 level, GBPUSD towards 1.5500, and reversing gains in EURUSD as the pair fell towards the 1.3300 figure.

Yesterday's emotional press conference by US Secretary of State John Kerry, who sharply criticized the Syrian chemical weapons attack on civilians, rattled both equity and currency markets as traders feared that the US may engage military action in response to the incident. Today, the UK government also stated that it is considering recalling Parliament early from its summer recess to discuss an "appropriate and proportionate" response to the atrocities in Syria.

The sudden emergence of geopolitical risk pushed aside any economic considerations, and markets ignored the relatively upbeat German IFO data, selling the euro (EUR) in the aftermath of the news.

German IFO data beat expectations, printing at 107.5 versus 107 expected. The index stood at 106.2 in July. This was the fourth consecutive monthly increase, and the German economy continues to show signs of growth amid steady domestic demand and improving conditions in the Eurozone as a whole.

The positive data did not translate into EURUSD rally, however, as the pair quickly sold off on the news, with some market observers noting that there was heavy fund selling right after the data that may have tripped stops as trapped longs tried to get out of the way. Still, EURUSD remains relatively firmly bid and continues to hold the 1.3300 level for now.

USD/JPY Slipping Lower Once Again

Going into today’s US session, the market will get a glimpse of the Case-Shiller housing data and the consumer confidence readings at 10:00 am ET (14:00 GMT). Both reports may be dollar negative given the recent weakness in US economic data, however, it remains to be seen whether the markets will have much of a reaction to the economic news given the focus on Syria.

Therefore, with risk-aversion concerns now the prime focus of the currency markets, any dollar-negative bets may be best expressed through short USDJPY positions. The pair broke below the 98.00 figure in late-Asian trade today and could test 97.50 as the day progresses, especially if geopolitical risks continue to loom throughout the currency markets.

By Boris Schlossberg of BK Asset Management

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27 August 2013 13:04 GMT