Last Week’s Currency Trading Review:
Support continued to erode for the EUR/USD last week. The strong U.S. economy was the catalyst behind much of the move. The Forex pair faces similar action this week because of comments from ECB President Maria Draghi who said inflation expectations have deteriorated across the Euro area. This is sending a signal to traders that the central bank policymakers are getting ready to add fresh monetary stimulus.
Previously, Draghi had said that worsening inflation would give the ECB a reason to implement broad-based asset purchases, or quantitative easing. Draghi may get his wish later in the week when the ECB is expected to report that Euro Zone inflation slowed to 0.3 percent in August, the weakest since October 2009.
Volume is expected to taper off throughout the week as many of the major players are expected to head to the sidelines ahead of next Monday’s U.S. Labor Day policy and because of the official end of summer. The thin trading conditions could create pocket of excessive volatility
The AUD/USD closed slightly lower last week. Bearish news out of China drove the market lower early in the week, but technically based buying helped the Forex pair recover by the end of the week.
About mid-week, the Aussie traded sideways-to-lower as traders reacted to comments issued by Reserve Bank of Australia Governor Glenn Stevens. He triggered a weak to neutral performance when he said the Australian economy needed more than interest rate action in order for growth to pick up momentum.
Stevens’ main argument hinged on the limited ability that an interest rate cut can have on economic growth. Instead, he said that confidence needs to improve before the Australian economy can show sustained growth.
On Friday, Fed Chair Janet Yellen delivered a speech on the state of the U.S. economy that Aussie traders perceived as slightly hawkish, or even a little dovish when compared to other Fed speakers. This triggered a strong short-covering rally into the close for the week.
This week there are no major Australian economic reports so the market may see limited price action accompanied by light volume ahead of the September 1 U.S. holiday. Several key U.S. reports could drive the AUD/USD this week. They include new home sales, durable goods and preliminary GDP.
Volume and price action may taper off late in the week after the reports and ahead of the U.S. holiday. In addition, after the September 1 break, traders will shift their focus toward the August U.S. Non-Farm Payrolls report
The USD/JPY soared last week, posting its largest weekly rise since July 2013. The rally was triggered when U.S. Federal Reserve Chair Janet Yellen suggested the economy was moving toward the central bank’s objectives.
In a speech at the central bankers’ conference at Jackson Hole, Wyoming, Yellen recognized the improvement in labor and inflationary conditions. While sounding a little more dovish than other Fed members, Yellen said the economy was strong enough to allow the central bank to focus on a few of the trouble spots such as labor market slack.
The upside momentum is expected to continue this week as investors take note of the acceleration of U.S. economic growth when compared to other developed countries such as Japan. Volume could be an issue this week. Because of the upcoming U.S. Labor Day holiday on September 1 and the end of the summer vacation season, many of the larger institutions may take to the sidelines this week, leading to low volume, but opening up the market to the possibility of expanded volatility.