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There seem to be more directional opportunities developing in the major forex markets at the moment, with US inflation and the Fed’s reaction becoming a key talking point, and beyond there worries that we may see further lockdowns in Europe, which could take the wind out of the Euro’s sails.

Once again economists are also questioning the primacy of the USD and whether it should remain the benchmark for the bulk of currency trades.

Victor Argonov, senior analyst at EXANTE says that in FX, the US dollar has remained the king – albeit, this is only so because in the kingdom of the blind, the one-eyed man (that is, the dollar) is king.

“Growing expectations over tighter monetary policy in the US, owing mainly to a surge in inflation and improvement in the labour market, is currently driving the US dollar higher across the board,” he notes. “Meanwhile, it is also worth keeping a close eye on currencies of major oil importers as crude prices show no major reversal signs yet, even if the oil market rally has slowed down a tad. The likes of the Indian Rupee and Japanese yen come to mind.”

Other major central banks, and to some degree the Fed itself, can be best described as being wilfully blind to the dangers of inflation.

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Chief among these central banks is the European Central Bank, which is why any hawkishness from the Fed continues to be magnified and explains the EUR/USD’s exaggerated downside moves.

That’s exactly what happened on Tuesday when the Fed’s James Bullard talked more hawkishly about the US economy and interest rates, with traders also noting improvement in retail sales and industrial production, both coming in well ahead of expectations for the month of October.

EUR/USD bears eye 1.10 handle

In addition to the dovish ECB, the single currency has also been coming under pressure because of fears Germany could introduce fresh lockdown measures for unvaccinated people within days amid rapidly rising coronavirus infections.

“We have already seen Austria go down this route,” says Argonov at EXANTE.  “If Germany follows suit, then this should further weigh on the euro in the short-term outlook.”

With the ECB remaining stubbornly dovish, and Covid cases rising sharply in the Eurozone, the EUR/USD could be heading down to 1.10 in the coming days as the policy divergence between the US and Eurozone grows larger.

Turkish lira entering bear phase

The losses for the Turkish lira deepened on Tuesday, with the weakness likely to persist as the USD/TRY surged past the 10.00 handle. It looks like investors are worried about another rate cut from the Central Bank of the Republic of Turkey on Thursday.

Despite surging inflation (currently above 20%) and the ongoing currency crisis in the country, the Turkish Central Bank, under the heavy influence of the country’s President Erdogan, has been cutting interest rates to tackle these issues, which makes about zero economic sense.

Yet, Erdogan insists on his long-held view that high levels of interest rates are the cause of the problem and they need to be slashed. So, economists are forced to expect a rate cut at the conclusion of CBRT’s meeting on Thursday, to the tune of 100 basis points to 15% from 16% currently.


Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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