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The US Debt Crisis And The Fallout On Forex

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The resolution of the US debt ceiling crisis’s effect on the forex market was somewhat different than what many traders had expected.

Dollar Falls Across The Forex Markets.

The general expectation amongst traders was that the US dollar would start to strengthen once a resolution was passed, we had seen a weakening Dollar over the last 3 months and this was mostly due to the debt crisis and so it would appear sensible to assume that if the problem was solved the Dollar would strengthen. This certainly was the case in the initial hours following the announcement of the resolution, with the Dollar strengthening nearly 100 PIPS initially against the Euro. This wasn’t to last though as the following day on the 16th of October 2013 the Dollar started to fall across the board, the EURUSD went back up nearly 100 PIPS, and then on the 17th shot through the 1.3600 level and kept going for another 200 PIPS in the following trading days. This was very different from the previous crises we have had where at the time of the resolutions the forex market would usually normalise back into range, but this time we see the Dollar fall to a 2 year low against the Euro. Was the perception after the resolution that there  had been too much damage to the US  economy? Whatever it was it was the Philly Fed Manufacturing Index that provided the catalyst for this bearish run on the Dollar, and again this was quite the reverse of the response you would have expected, with a strong result much better than expected but the Dollar fell again.

Forex Market Makers.

Whatever the actual reason for the further weakness in the Dollar, it could be that since the US was borrowing more then that would increase the money supply in the US which would translate to a weaker Dollar. It could have been that while the crisis was going on that the market just didn’t want to move , since it was perceived too risky to pile in one way or another at that stage. But whatever actually happened you can bet the forex market makers had it covered, there would have been a lot of trading short from the 1.3600 – 1.3500 area on the EURUSD, which was the perfect opportunity for the marketeers to buy at a low price that appeared high at the time and then drive the price straight up before traders got on the bandwagon. Forex is a very complex business, and your aim is to simplify it, and this could have been done by looking at the EURUSD daily chart, always easier in hindsight, but you can clearly see there was strong support at the 1.3500 level and also candlestick formations to confirm that the market was about to go up.

 

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