FX Outlook on Some of the Major Currency Pairs
As a trader, it’s important to understand what makes the pairs move. Like crypto coins, there are a lot of factors that can change the dynamics of a currency pair. From political events to economic aspects, currencies can make a wild swing.
In this guide, we’ll breakdown what’s the outlook for some of the major currency pairs and how you can use the info to trade them.
1. USD/JPY
First, let’s talk about USD/JPY, Gopher.
Factors that influence the value of the US dollar and the Japanese yen, both in respect to each other and other currencies, impact the USD/JPY. The Japanese economy has been growing since 2012, but the latest coronavirus outbreak has thrown the country into disarray and slowed development.
Despite its difficulties, the yen remains a safe haven currency, which means that when markets are volatile, investors flock to the Japanese yen, causing it to rise.
A key point to add here is that when the global economy is robust and stock markets are rising, the yen tends to fall, as we have seen in 2021 that the Japanese yen has depreciated against major currencies.
The US dollar (USD) has a big impact on the yen. In general, when the dollar strengthens, the yen weakens, and vice versa. Furthermore, when compared to each other, the interest rate differential between the Federal Reserve (FED) and the Bank of Japan (BOJ) impacts the value of these currencies.
When the Fed intervenes in financial markets to boost the US dollar, the value of the USD/JPY cross might rise as the US dollar strengthens against the Japanese yen.
So, what’s the outlook?
Despite weaker US payrolls numbers, the USD/JPY rose to its highest level in almost three years on October 11. Traders will remain hopeful that the Federal Reserve will announce a reduction of its mammoth bond-buying program next month.
Traders ignored the mainly negative employment news from the previous week, driving US bond rates higher. As a result, for the first time since December 2018, the yen, renowned for being particularly sensitive to interest rate differentials, touched 113 yen per dollar.
As oil prices touched multi-year highs on the back of the energy crisis gripping major countries amid a pick-up in economic activity, the Japanese currency was also affected by a modest tilt towards riskier currencies, with the Australian dollar gaining against the greenback.
Expectations of a Fed tapering announcement shortly should drive US treasury yields higher, with Japanese government bond rates firmly anchored and the Bank of Japan maintaining policy on hold.
It will increase the yield differential between the US and Japanese government bonds, making the USD a more appealing currency.
On the below chart, you can see that USD/JPY has been trending higher since the start of 2021.
2. GBP/USD
While the US dollar is the most popular currency among forex traders, the GBP, or the British pound, is also a strong contender among the world’s most popular currency pairs.
The GBP/USD, cable, is one of the world’s top five most traded currency pairs. It is influenced by variables that impact the value of the British pound and/or the US dollar regarding other currencies and each other.
Therefore, the interest rate differential between the Bank of England (BoE) and the Federal Reserve will impact the relative value of these currencies.
When the Fed intervenes in open market operations to boost the US dollar, the value of the GBP/USD cross might fall as the US dollar strengthens against the British pound.
And that’s what we saw in 2021. The cable trended upwards for the first five months of 2021 but is facing a decline.
Brexit and delta variant is affecting the GBP. Last week, the UK and France clashed over fishing rights, a key sector, while London and Brussels squabbled over the Northern Ireland deal. As a result, the pound became susceptible to the greenback.
Although most of the population has been vaccinated, the number of cases is rising regarding delta variants. Britain is seeing the highest cases since July. So, these factors are hurting sterling.
3. EUR/USD
Because it mentions a union of two of the world’s largest economies, the EUR/USD pair, fiber, has become the most extensively traded pair globally.
Since the outbreak of the pandemic, growth in the Eurozone’s 19 nations has been slow. Moreover, uncertainty over the severity of the coronavirus has pushed the Euro against safe-haven currencies like the USD, JPY, and CHF.
A second wave of the coronavirus has caused low growth forecasts in Eurozone countries, potentially harming the Euro in 2021.
When these currencies are compared, the interest rate disparity between the European Central Bank (ECB) and the Federal Reserve (Fed) impacts their value.
When the Fed intervenes in open market operations to boost the US dollar, for instance, the EUR/USD cross may dip in value as the US dollar strengthens against the Euro, as it did in 2021.
As for the outlook, the pair dropped below 1.1600 in October 2021, the lowest level since 2017.
Traders will also keep a close eye on developments in the US government bond markets. The 10-year Treasury yield is presently attempting to rise above 1.60 percent.
If this effort is successful, it will acquire further upside momentum and move towards the 1.63 resistance level, which will be good for the US dollar.
In the case of the EUR, the ECB is unlikely to taper QE or raise rates anytime soon; given inflation is expected to stay low for some time. The Euro is vulnerable to any sell-offs due to its massive long position, and one has to question where the new buyers will come from.
Final thoughts
No one can predict where the market will head next. Moreover, as the crypto market, the FX market is prone to economic and political factors. So, as a trader, you should analyze each pair carefully before jumping to any conclusion.
DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks. We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.
