Looking ahead in August at the foreign exchange market we can see that this will be one of the most important months for traders as they position themselves ahead of time for the much anticipated interest rate decision from the Federal Reserve and the speech from chairwomen Janet Yellen at the September meeting.
Traders will be watching USA fundamental data very closely in August and the most important news events in the calendar such as the ISM manufacturing and Non-farm payrolls are likely to have significant volatility around them.We have already seen this week a trend developing of a particularly quiet European market sessions and very active USA sessions as the interest begins to build around there data releases as traders are clearly looking intently at good and bad data points.
From a trading point of view I always like to take a step back and think to myself what a very smart trader would be doing at this point time as we approach the rate decision which has highly explosive consequences in either direction if they either choose to take rates up from the current level or a decision to stay the current path and keep them exceptionally low for a sustained period.
It is my opinion that a smart trader will not be taking a position in the middle of the present ranges in the foreign exchange market rather he would be playing around the edges.It is certainly not advantageous to take a longer term speculative position mid-range now unless you are extremely risk averse and happy to see significant swings in your position ahead of September.
An example here would be the EURUSD as we currently sit boxed in a range of 1.0800 to 1.1200 which is becoming increasingly tense and searching for a clearer direction.A smart trader will be looking to take trade around the extreme support and resistance and keep his powder largely dry for the big September news event and not getting to short or long either side of the fence before the rate decision comes out.
For the EURUSD a sustained break of the 1.1200 level opens the door for further advancement to the 1.1280-1.1380 range and we could well see traders start to sell these areas in search of a top.
Also buying may begin in the 1.0730-80 region if we do a break of the current 1.0800 support as this would present an excellent chance for traders to buy into the market at relatively cheap EURUSD rate.
The GBPUSD is also an excellent example.The current 1.5400-1.5700 is a relatively large range for this pair to be carving up and i expect it to test both extremities in August in a hope to wash anyone who likes to sell the low points or buy the high points.My mentality would be to swing trade around the extreme support and resistance points on GBPUSD until the FED announcement as there could be some real stop hunting and swings going on.
One important thing to add here is that the market does like to trick us mentally and emotionally and anytime in August a particular currency pair looks exceptionally weak or strong early on in the month I would be very cautious around it,especially if it is at the bottom of a recent range.The market can squeeze us very hard if we take a position to early in August and it is advisable that those who do this have deep pockets as September is still far away.
My trading plan for August will be to trade around the edges of any recent ranges and more importantly be very patient with my trading on any given day we have major USA data coming out.
Stay safe out there and have a great August.