With concern around the world regarding the global economy when looking at the Forex markets, the average trader will be better served to stick with some bigger pairs: Major Currency Pairs. Liquidity could be a significant issue, as there have been a few shocks in the global economy over the last several months.
There have been banking issues in the United States, central banks worldwide continue to tighten monetary policy, and inflation remains high in the United Kingdom. Furthermore, the Bank of Japan continues to practice yield curve control, further distorting currency markets.
As a result, most trading in May will probably be tailored toward most of the world’s major currencies, as some of the smaller and exotic currency markets may be very difficult to handle. With the volatility that markets, in general, have seen recently, getting in and out of a position will be paramount.
The EUR/USD pair is by far the most widely traded currency pair in the Forex markets, and therefore liquidity is rarely an issue. Beyond that, the European Union will continue to see interest rate hikes, and the European Central Bank remains hawkish. On the other side of the Atlantic, the Federal Reserve has been raising rates but appears to be reaching the end of its rate-tightening cycle, which could continue to bring buyers into the market. However, if there is a sudden “risk off” situation globally, the US dollar could find inflows.
The US dollar/Japanese yen could be one of the more interesting pairs to trade over the summer. This is because it is a pure interest rate differential trade, with the Federal Reserve recently raising interest rates to 5.25%. At the same time, the Bank of Japan continues to practice yield curve control, which will keep the yen’s value very weak. That said, there is a strong carry trade to be had in this pair.
The British pound has been solid for some time, knocking on the door of a significant breakout against the greenback. The United Kingdom continues to fight inflation, so the Bank of England will likely have to be very tight with its monetary policy. If things stay the same, the British pound will likely remain strong. While there is much noise in the market, the reality is that, historically speaking, the British pound is relatively cheap.
The Australian dollar could be an interesting market in May, as it is a highly leveraged commodity market. Commodity markets have been extraordinarily volatile over the last several months and, therefore, could start to try to find some range or trend. With that being the case, if you begin to see commodities pick up a bit of strength, that could make the Australian dollar a desirable currency. On the other hand, if the Chinese mainland economy starts slipping, that could be very negative for the Aussie.
The US dollar continues to be considered a safe currency, but the Swiss franc has that same appeal. The pair could be very noisy but remember that it tends to correlate negatively to the EUR/USD pair. Ultimately, this market will be paying close attention to the strength of the continent of Europe and, of course, whether or not the US economy starts to slow down. That being said, it will more likely than not be choppy, regardless of which direction.
With the recent massive selling of crude oil, the Canadian dollar could come into the picture. If the crude oil market starts to recover, it could offer quite a bit of support for the Canadian dollar, which is highly levered to price action in the oil markets. Furthermore, it works both ways. In other words, if oil demand continues to crumble, it would make sense to see this pair rise, as a US dollar rally against the Loonie would be typical of both economic slowdown price action and crude oil falling.
The New Zealand dollar could be attractive in May, as it is heavily levered to agricultural commodities. As a general rule, as the economy goes in China, so goes the New Zealand dollar. Furthermore, the interest rate markets continue to play havoc with bonds worldwide, making the once very strong New Zealand carry trade a little less active than we have seen in the past. However, as traders worldwide continue to look for more yield and the market is trying to price interest rate cuts in the United States, this pair could rise.
The Euro trading against the Japanese yen will have many of the same characteristics as the USD/JPY pair, as it will more or less have much to do with the Bank of Japan and its yield curve control policy. However, if the Euro strengthens against the US dollar, this pair could be even more attractive than the USD/JPY pair. By paying attention to the EUR/USD pair, you can determine which of those two currencies will be more robust against the Japanese yen.
This pair could be very noisy with the high inflation in the United Kingdom and the European Central Bank doing everything possible to fight inflation. However, it usually tends to hold a very well-defined range, so it may offer short-term trading opportunities during May. Furthermore, the pair is a great secondary indicator of the Euro or the British pound’s strength against other currencies.
Many traders pay close attention to the Euro/Swiss franc pair to understand what risk appetite is doing. As the pair rises, it means that money is flowing out of the relative safety of Switzerland and being put to work in riskier assets in the EU. On the other hand, if money starts flowing toward the Swiss franc, traders are very cautious, and it becomes a feedback loop. Even those who do not trade this pair often pay attention to it to get more information about what other markets may do.
The data suggests that the most profitable currency pairs to trade in May 2023 will probably involve significant currencies, including the Euro, US dollar, British pound, Australian dollar, Canadian dollar, and Swiss franc. These pairs have greater liquidity and are less susceptible to shocks to the world economy. Additionally, some pairings may be advantageous for traders since they provide possible carry trade possibilities and are sensitive to price movement in commodities markets. The recent volatility of the markets must be kept in mind, though, as taking and exiting positions will be crucial. Market participants should closely monitor the health of the economies of Europe, the USA, China, and monetary policy from central banks.
With FP Markets, you can trade more than 70 currency pairs, offering a wide selection of Majors, Minors and Exotics Forex Pairs. Consider opening a Demo Trading Account with us and exploring the FX space through our range of trading platforms, including MT4, MT5, cTrader and Iress.
Charts: Daily Timeframe (TradingView)
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