After a very active and exciting 2020, the mood does not seem to have changed in the new year and thus, FX traders will need to face numerous challenges ahead. A reflation might occur in case the pandemic will be under control, but at the same time, will come with multiple drawbacks, including higher inflation and interest rates. We would like to share a few useful tips for the ongoing quarter since a lot could be going on in the FX market.
#1 Watch for a greater USD pullback
At the time of writing, the USD is bottoming out, following months of selling. The enthusiasm around the “Blue Wave” seems to be vanishing and the markets have become aware the new administration will have a hard time finding Republican support for its spending plans. We’ve already talked about some USD prospects after the US Senate shifted towards the Dems and how the Dollar’s performance during the past weeks confirms the growing skepticism.
#2 Key technical areas continue to matter most
There continues to be this tough of war between those believing the pandemic can still damage the economy and those that view it in the rearview mirror. Also, the reflation camp encounters opposition from those believing higher inflation and interest rates could be damaging for the recovery.
In such a case, a retail FX trader doesn’t know what to focus on, so the only option left is price action. Key technical areas will continue to weigh heavily on the market developments and thus we need to watch closely for shifts in the order flow around those zones.
#3 Monitor inflation developments
For the time being, average US inflation is rising at 0.4% MoM, which means the 2% target should be reached before the year-end. The Fed already announced a shift towards average inflation targeting, so the prospects for any interest rates hike are modest. However, underperformance or outperformance of inflation can be a game-changer, not only in the US but all around the world.
#4 Adjust your risk downwards when volatility spikes
Risk management will be the main tool to navigate uncertain market conditions. When volatility is high and prices move aggressively, it would be appropriate to trim down your position size and place larger stop losses. Also, make sure to be selective with the trading signals showing up since a lot of false setups will very likely develop. We hope you have good luck trading and many pips to come!