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FX.co ★ Markets are waiting for a correction (A corrective decline is expected in the EUR/USD and GBP/USD pairs)

Markets are waiting for a correction (A corrective decline is expected in the EUR/USD and GBP/USD pairs)

This week turned out to be quite calm in the stock markets as expected, although the volatility itself increased significantly. A similar situation is observed in the Forex currency market, where the emerging weakening of the dollar has stopped.

In the markets, many believe that the rally in stocks has simply slowed down and will resume again as soon as Congress decides to ratify the $1.9 trillion support measures for the economy. They also believe that the expansion of the vaccination process will support the demand for shares of companies due to the prospect of a more active recovery in the US and other Western countries.

However, this is only one part of investors, and there is also another, which, probably, by its actions, stopped the rally. They believe that broad-based stimulus measures, with $1.5 trillion in liquidity spilling into the markets, will trigger a sell-off in government bond markets, which will cause their yields to rise. In turn, this will also cause a wave of demand for the dollar. The Fed, wanting to control the yield curve of treasuries, will be forced to change its monetary rate. First, it will have to abandon the purchase of government bonds, and then move on to the process of raising interest rates. And all this, as expected, can occur against the background of a sharp increase in inflation above the acceptable level of 2.0%.

This scenario will put a strong pressure on the demand for company shares, which will cause a wave of sales. In this case, investors will get rid of them and at the same time buy the dollar as a reserve currency.

This scenario is extremely dangerous for the stability of financial markets, given the very large financial "soap bubbles" that have been inflated since 2009, when the Federal Reserve and other major world central banks actively began to extinguish the crisis with huge flows of liquidity in national currencies. If this happens, we will witness a new collapse in the markets, which will be significantly larger than what happened in the United States in 1929 and was the forerunner of the global crisis that turned into the catastrophe of the Second World War.

We believe that the general period of consolidation in the markets will continue today and, possibly, at the beginning of next week. In general, we are more and more inclined to believe that the stock markets may begin a corrective decline with a simultaneous strengthening of the US dollar in the near future.

Forecast of the day:

The EUR/USD pair is consolidating on the wave of rising demand for the dollar in the conditions of a possible correction in the stock markets. The pair may fall to 1.1965 after falling below 1.2110.

The GBP/USD pair is correcting downwards in anticipation of the publication of data from the UK. If the GDP figures for the 4th quarter turn out to be worse than expected, as well as the values of production indicators below forecasts, this may lead to a continuation of the local decline of the pair to 1.3750 in line with the general short-term upward trend.

Markets are waiting for a correction (A corrective decline is expected in the EUR/USD and GBP/USD pairs)

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Markets are waiting for a correction (A corrective decline is expected in the EUR/USD and GBP/USD pairs)

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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