Forex Traders Prepare “To Go the Way of the Move”

This week’s Forex markets have been highlighted by low volume and tight ranges, leading to the formation of consolidation patterns in many of the major currencies. The combination of low volatility and compressed prices is the perfect formula for chart pattern breakouts.

Unfortunately, the direction of the breakout isn’t very clear, leading to the conclusion that many traders are likely to adopt a “go the way of the move” trading strategy. Fortunately, breakouts today will be triggered by one major fundamental event which drastically reduces the possibility of a whip-saw market.

Often when faced with a chart pattern breakout triggered by an economic report, there is a whip-saw. This often occurs when one piece of the report is bullish, for example, and the other is bearish. This may be caused by a report which features a headline number followed by a percentage change such as the U.S. Non-Farm Payroll report. Fortunately today, there is only one indicator to watch and that is Federal Reserve Chairman Ben Bernanke.

Ahead of his speech at Jackson Hole Forex traders are silently hoping Bernanke outlines a plan to jump-start the economy with clarity and conviction. This will be the best scenario for breakout traders because the markets are likely to move in one direction. If Bernanke wavers in his speech and instead offers a candy-coated speech containing words of comfort and support, then the markets are likely to whip-saw.

Simply stated, if Bernanke offers stimuli or goes as far as proposing another round of quantitative easing, then investors should look for most major currencies to move higher versus the U.S. Dollar.

A tricky scenario is likely to develop if Bernanke offers nothing of material value to help traders make a decision. Since the Fed is already committed to lower interest rates until mid-2013, the Dollar is expected to continue to weaken over the long-run. However, if traders react to the Bernanke speech by selling off risky assets, then money may flock to the safe-haven Dollar, leading to a rally.