Restored Liquidity Leads To Volatility And Breakouts For The Forex Market

After two weeks of depressed liquidity, currency traders have decided to make their return to the market a memorable one. Breakouts have been marked across a number of the majors and equally charging moves were developed through many of the crosses. Where will the market go from here and what pair is best positioned? Read our DailyFX Analysts' opinions below.

Chief Strategist - Antonio Sousa

My picks: Remain Short EUR/USD
Expertise: Economics and Behavioral Finance
Average Time Frame of Trades: 1 week - 3 months

Since the beginning of the year the euro has been falling like a rock against the dollar on speculation the European Central Bank will have to cut rates to stimulate growth and prevent an already sharp economic a recession to become a much deeper depression. In fact, this morning the EUR/USD fell nearly 200 pips after the ECB Vice President Lucas Papademos said "further interest-rate cuts may be needed should inflation keep slowing". I have been short EUR/USD since 1.47 and I expect more EUR/USD weakness going forward. To some extent, I expect a considerable deterioration of the euro zone economy in 2009 which could lead to a significant shift of interest rate differentials in favor of the U.S. dollar and keep the EUR/USD under pressure over the next few months.

Senior Currency Strategist - Jamie Saettele

My picks: NZDUSD long, against .5656, target .618
Expertise: Technical
Average Time Frame of Trades: 1 month (this is short term...probably about 1 week)

Expectations are for a rally through .6090 while the NZDUSD remains above .5656. This would complete 5 waves from the low (.5186). Fibonacci at .6183 combined with congestion in that area is likely resistance.

Currency Strategist - John Kicklighter

My picks: Pending GBPUSD Breakout
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week

Kicking off the first full week of the new year, we can already see the influence of a major rebound in liquidity. Stalled rallies have been reversed, tight consolidation phases have turned to breakouts and some pairs have even found the impetus behind mature trends once again. I am most impressed with the activity in the dollar. Among the majors, the dollar has seen a significant boost in strength against the euro, franc and Japanese yen (the latter perhaps the most technically significant). However, there are signs that the dollar isn't the dominate force in the market - a consideration that we can see in the commodity bloc's strength against the American currency. This puts GBPUSD in a unique position. It typically falls in line with the euro and yen when there is conflict, though this pair has held its ground and its in fact growing even more pressurized in a fading wedge. No doubt a breakout is imminent; but direction is less clear than I would care for.

Fundamentally, the UK and US are generally in the same bearish predicament. Both economies see deepening recessions, benchmark lending rates that are tumbling quickly towards zero and local financial markets that are struggling to find stability. Determining which economy has the stronger future is highly speculative. Alternatively, looking at the charts, it is clear that the momentum is still solidly in line with bears; yet recent congestion gives us reason to believe the even fundamentals may have found a temporary equilibrium (or extreme point) in this pressed trend. I will approach this pair without a singular conviction towards direction. My bearish bias is perhaps stronger considering long-term momentum and my outlook for interest rates. In this scenario, a confirmed break (daily bar close) below 1.4350 is essential. Looking back to the early part of this decade, we can see the next levels of support come in around 1.40 and 1.3685. A tiered entry will target a nearby target first and then a second objective that perhaps looks to squeeze momentum. Alternatively, a bullish reversal will need to breech the falling trendline from the December 17th swing high (which is somewhat discretionary). While such a move could mark a major turning point for this pair, it will not be confirmed until a significant swing high is overtaken (1.5725?) to break momentum. Therefore, I will keep a bullish outlook attached to wide stops and reasonable targets.

Currency Strategist - Terri Belkas

My picks: Long AUD/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 - 3 Days

This is actually my pick from last Monday, and I'm going to stick with it this week. AUD/USD has been slowly creeping higher as emerging risk appetite has helped to provide a boost to equities, commodities, and the commodity dollars. I noted last week that the December highs of 0.7100/40 should provide some resistance, where AUD/USD is currently trading, but I see potential for a test of the 50% fib of 0.8524-0.6007 at 0.7265/75.

Currency Analyst - John Rivera

My picks:Short EUR/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days

I am going to have to reiterate my pick for 2009 and continue to stay short EUR/USD as the pair just broke below the 100-Day SMA and is looking to test the 50-day SMA at 1.3173. Dovish comments from ECB Vice President Lucas Papademos and hopes that the Obama fiscal stimulus package will help the U.S. emerge from their recession has increased the downside risks for the pair.

Currency Analyst - David Song

My picks: Short EUR/CHF
Expertise: Fundamentals and Technicals
Average Time Frame of Trades: 2 - 10 Days

As the EURCHF continues to hold a broad range, expectations for an ECB rate cut is likely to weigh on the pair over the near-term. After slipping to a low of 1.4299 on 10/27, the EURCHF snapped back to reach a high of 1.5885 on 12/15, but the sharp pullback from the December high suggests that investors are bearish against the pair. The interest rate outlook for the Euro-Zone favors a bearish outlook for the pair, and I anticipate the euro-franc to hold its range over the foreseeable future as market participants anticipate the ECB to ease policy further over the coming months. I expect the pair to face increased selling pressures over the week, and we may see the pair work its way towards the 11/12 low of 1.4716 over the following week.

DailyFX

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