Lesson No 2 – What is the price action trying to tell us?

Posted Tuesday, September 13, 2016 by
Skerdian Meta • 2 min read

We now know where all the major forex pairs stand today after the FED rollercoaster. But that doesn´t really help us, does it? We have to figure out why the price is where it is and what it´s trying to tell us as it moves around. We are not financial journalists who only report what´s happening, we are forex traders who are trying to make a profit from the market moves. But in order to be profitable, we must anticipate the moves, that´s why we have to read and understand the price action.  

So, what does the price action in the last few days tell us about the market sentiment?

EUR/USD and its price action were the first to give us the first clues of what the market sentiment is. This forex pair was the first to jump up about 50 pips, but it quickly paired gains when the other major currencies were still marching higher against the Buck. Brainard´s comments were very dovish and the interest rate hike odds were slashed, but somehow the Euro couldn´t benefit. What does that tell us? 

The forex market might want to sell the USD after Brainard, but it surely doesn´t want to buy the Euro. The fundamental analysis for the Euro (which we will cover soon, probably tomorrow) is pretty dovish, so when the market sentiment is bearish towards the USD, the gains in EUR/USD are very limited, such as in this occasion. When something doesn´t go up on good news (bad news for the USD is good news for EUR/USD) it means only one thing, once the situation reverses then the chances are that it will go down hard. 

Ok, the inability of the Euro to take advantage of the Buck when it´s being kicked to the floor might be due to the Eurozone circumstances and the ECB. How about the rest, what does the price action between the USD and the other major currencies tell us?

Leaving aside the GBP, which is going through a strange period, the rest of the major currencies are not feeling as bright as it seemed last night. The commodity Dollars are now about 70 pips lower against the USD comparing to where they were before Brainard started speaking and more than 100 pips from the high last night. The price action in these forex pairs tells us that the uncertainty is very high. The forex market feels that it is safer buying the USD even after a very dovish Brainard than buying the commodity Dollars, even though they offer higher interest return. 

So, one thing is clear after the price action we have been seeing yesterday and today, the downside in the USD is much more limited than the upside. Losses are limited after disappointing US economic news/data while the gains are bigger. In this market sentiment, I hope the FED keeps the interest rates unchanged next week and the USD suffers some losses, which will present us with a good buying opportunity. 

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