It’s a big week for the Greenback… FX reporters and traders are speculating intensely about what the testimony of Federal Reserve Chair Powell will do to the dollar.
Today’s short article will discuss how the market could react to the news events of this week.
Opinions are split on how Powell’s testimony and other US economic data will be received by the market. From a purely fundamental perspective, it can indeed be difficult to know which way investors will drive any currency. Sometimes price shows clear follow-through from the initial movement that happens during a news release, while at other times price is driven in one direction initially, only to be fully reversed in the hours that follow the event.
One explanation for this can be given when one considers the idea that large market players may begin to partially position themselves in one or the other price direction already prior to an important news event, and then continue with the bulk of the order placing after the news event is over. The positioning may or may not be in alignment with the most obvious interpretation of the implications of the news (i.e. bad USD data does not have to mean sell-off, if perhaps a decision on buying large amounts of USD is already made prior to the event).
Price-Action is a direct mirror of the overall positioning of investors, which is why technical analysis can often anticipate in which direction price will move more likely before a news release.
Following, then, are some of my thoughts regarding the impact of this week’s USD news:
Technically, the USD is trading at price zones where significant reversals are likely against many other currencies. This is putting a bias towards USD strength, as opposed to ongoing sell-off in this week’s FX showdown.
There is of course still scope for further USD selling, but it seems not unrealistic to assume that larger market players consider the USD to be pretty cheap across the board right now, and could decide to prepare for USD buying regardless of what Powell says or doesn’t say.
This why my best guess is that we could see an initial reactionary USD sell-off during the key news events, which should however be short-lived as ‘smart money’ comes in and begins to buy USD in a serious manner at the most discounted prices.
I won’t bet my ‘bottom dollar’ on it, but this scenario seems the most logical to me. We shall see what happens…
All the best along your trading journey