Sorry about the title. The Sandwich in question refers to the chart above. This chart is of the GBP/USD Forex pair. You can see how there was a massive Down-day on Monday, then a massive Up-day on Tuesday, followed by another massive Down-day on Wednesday. It’s just like a roller-coaster…sort of.
It seemed for a second that the Dollar was on the backfoot, but clearly the action today has proved that wrong. I am not saying that we will necessarily be seeing a strong dollar against the pound in the short term, but you can’t argue with price action. What’s funny is that the Euro actually gained a little bit on the Dollar today. There were some slightly contradictory comments out of the ECB as I mentioned earlier this week. Those comments obviously fueled the Euro drop we saw. However, the negativity around that has eased a bit. The ECB will not be engaging in Quantitative easing on the scale we have seen in the US. They have no intention flooding the markets with Euros, nor will they drop interest rates to 0. The remarks as to whether or not the rates will drop below 1% might have caused a stir, but I think it’s safe to say that they will not go below 0.5%.
This seems more likely as the figures that came out of Germany, Europe’s biggest economy, were not nearly as bad as people had predicted. They have quite some clout in influencing European Policy. They don’t want quantitative easing. They will use the figures to show that things may not be as bad as some think, thus reducing the need for more action e.g. interest rate cuts by the ECB. The case for this might be even stronger if the figures expected next week come in better than expected. All of this meant that the Euro was able to hold its own against the dollar.
Not so for the Pound. The pound is suffering. It really wants to rally against the dollar. It really does. But every time it’s about to shoot off, the brits get another round of crappy news. So you end up with a sandwich. There’s also some more bad news to come. That rally will have to wait.
Still, all of this might not last long. There’s nothing really strong driving the movements we are seeing in the Euro. Positive Equity markets did not uniformly provide a massive boost, so there might be a change in how the Risk trade works soon. The Forex markets are still very sensitive to the stuff that is going on in the equity markets, however, things may be changing. The sensitivity remains, but the beneficiaries may change. In essence, we might be on the way back to how things normally are. In normal times, positive sentiment in US Equities would be good for the Dollar. The same would apply to Europe…anywhere infact. Lately, that has been reversed for the Dollar because it has been used as a haven against risk. So a positive day meant people took their money out of the dollar and US-based assets into more dangerous waters, so to speak. Well, last week, we actually had a couple of days where the Dow was positive, and the dollar was as well. As Volatility comes down, we will see more of this.
More analysis will have to be done as we trade because each different Dollar Currency pair will have to be traded on it’s own merits – or lack there of – in order to make money.