Weekly Trading Forecast: Will Volatility Spread to the FX Market?
Article Summary: Geopolitical tensions boiled to the surface this past week and created significant market swells. Is this just another one-off jump in fear or a turning point in sentiment? What lies in store for the currency market should volatility return?
There was a considerable commotion in the financial markets this past week with sharp declines in global equities and sizable swells in volatility measures (the short-term equity-based measure increased nearly 60 percent on Thursday).
Now that inflation expectations are falling, additional evidence of slowed growth can compound the issues facing the Euro in the near-term. While we anticipate exogenous influences maintaining their clout with respect to the Euro, we shouldn’t be dazed by the low volatility state persisting in spot FX markets, as more local influences are starting to exert themselves on the Euro once again.
The Bank of England (BoE) Minutes and the U.K.’s 2Q Gross Domestic Product (GDP) report is likely spark increased volatility in the GBP/USD as market participants continue weigh the outlook for monetary policy. The BoE policy statement may prop up the British Pound as a growing number of central bank officials show a greater willingness to normalize monetary policy sooner rather later.
The Australian Dollar’s consolidation continued over the most recent week with AUD/USD remaining within its narrow range between 0.9210 and 0.9440. A status-quo set of Minutes from the RBA and positive Chinese second quarter growth figures failed to inspire the Aussie bulls.
Gold prices are considerably lower on the week with the precious metal down more than 2.3% to trade at $1307 ahead of the New York close on Friday. The losses come amid a tumultuous week for markets with geopolitical tensions continuing to build both in Ukraine and Israel.
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