Trading Opportunities of 2016: Key Currency Crosses to Watch amid the Diverging Paths for Monetary Policy
The deviating paths for monetary policy in Europe accompanied by the rebalancing in the Asia/Pacific region may draw greater attention to the EUR/GBP and AUD/NZD exchange rates as both pairs stand at risk of facing increased volatility in 2016.
With the European Central Bank (ECB) broadening the scope as well as the duration of its quantitative easing (QE) program, EUR/GBP may continue to give back the advance from back in 2007 especially as the Governing Council keeps the door open to further embark on its easing cycle in 2016. Despite the delay it the Bank of England’s (BoE) normalization cycle, signs of a stronger recovery may spur a greater dissent within the Monetary Policy Committee (MPC) as a growing number of central bank officials prepare U.K. households and businesses for higher borrowing-costs. As a result, the downward trending channel carried over from 2013 along with the bearish formation in the Relative Strength Index (RSI) may continue to take shape in the year ahead amid the disparity in the policy outlook.
After slipping to a fresh record-low in 2015, AUD/NZD stands at risk for a key reversal as the pair appears to be an inverse head-and-shoulders formation, which is largely accompanied by a bullish divergence in the RSI. In turn, the downward trend from 2011 may largely unravel as the Reserve Bank of Australia (RBA) endorses a wait-and-see approach for the year ahead but, the pair may make another run at parity should the Reserve Bank of New Zealand (RBNZ) move away from its easing cycle over the coming months. After reducing the overnight cash rate to a fresh record-low of 2.50% in December, Governor Graeme Wheeler may find it increasingly difficult to further insulate the New Zealand economy as the central bank turn increasingly confident in achieving the 1%-3% inflation target-range over the policy horizon. With that said, the New Zealand dollar may outperform its Australian counterpart next year should the RBNZ change its tune for monetary policy and continue to soft the verbal intervention on the local currency.
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