Volatility in forex trading has returned. We may just be a third of the way through the month, but on several of the major pairs and crosses, September has heralded a significant increase in volatility. Currencies spiking higher and lower, testing support and resistances and in some cases making key breaks. A trend of dollar strength has been the underlying cause, but add in ECB monetary easing and the prospect of Scottish independence and traders have got a lot to consider. Today’s price moves have just been more of the same.
Although we have not seen the sharp declines on the euro or sterling, the two currencies have been pulled back and forth as forex traders have struggled to work out where the pairs should be trading. Stretched momentum which suggests oversold technical rallies are due have further muddied the waters.
The volatility on sterling has increased sharply in the past week. One week volatility (blue on my chart) is now at the highest level since early January, whilst 1 month volatility (orange on my chart) is the highest since February. This is good news for currency traders who are finally getting the action on their trading that they have been craving. The big increase in volatility has been seen since the polls on Scottish independence started becoming incredibly close on Tuesday 2nd September. This is likely to continue at least until the vote takes place on Thursday 18th September.
This morning, there have been rumours of another poll on the Scottish referendum that points towards a “Yes” vote on independence, possibly as high at 53% in favour. An initial kick to the downside was though formed support at $1.6050. The subsequent rebound has again found resistance under the $1.6157 reaction high from yesterday as indecision whether to chase a rally has taken hold. There is the prospect of a technical rally with momentum indicators still incredibly oversold. However the resistance at $1.6157 remains intact, whilst also $1.6186 is also a barrier. However if the bulls can gain some traction this afternoon then a rally could really begin to take off. The gap down at $1.6282 still needs to be filled. I am now open to the prospect of this being an exhaustion gap (ie. the final throws of a sell-off), but we shall see. Mark Carney speaks today and traders will be looking for any hawkish hints as usual.
There is no such gap on the chart of EUR/USD, however, there is though the prospect of a technical rally. Consolidations have tended to be sold into on a consistent basis through the selling pressure of the past few weeks. However, a consistent move above $1.2960 would interest the bulls, whilst a push above the reaction high at $1.2986 would suggest a recovery may be coming. The fact is that there is very little real resistance (aside from $1.3000 psychological) until $1.3100.
Both pairs seem to be looking to fight back today after fundamentally driven sell-offs. Perhaps an oversold rally is not far away for both euro and sterling.