The GBP/USD index continues to rise against the U.S. Dollar with the EUR/USD dropping into a bear market. Even though the U.S. stock market seems to be moving back to its pre-recession levels, the U.K. and the European market are doing little better. A weak economic outlook in the United States and a global slowdown in the auto industry have weighed on the U.S. economy.
In the past, the GBP/USD had performed well against the U.S. Dollar. However, a weakening U.S. economy has been the catalyst for this trend reversal.
Since the Federal Reserve is currently being forced to take action, it appears that they will be more aggressive in tightening financial conditions in the U.S. and Europe. As the Fed makes its next move, many believe that it will tighten mortgage rates, possibly lowering the interest rate on the 30-year fixed rate mortgage. If the Feds do tighten mortgage rates, this will cause many to sell off of safe assets such as U.S. Treasury Bonds, CDs, and the like. This will lead to further deterioration in the U.S. Dollar and the EUR/USD.
If the EUR/USD does break support, this could lead to the EUR/GBP to decline against the U.S. Dollar. However, with the recent EUR/USD appreciation, it appears as if the EUR/USD may soon reverse to a greater appreciation versus the U.S. Dollar. The FTSE 100 index and the NFA are both set to rise.
If the U.K. and the European market continue to suffer from their poor economic environments, there is little doubt that the U.K. and the Euro would also suffer. The U.K. is not going to recover and the European Union is not going to have the ability to continue to function. Even though the Bank of England has said it plans to purchase some more of its own bonds to stimulate its economy, the plan will be unsuccessful unless there is a change in its policy which is currently taking place. which is allowing it to increase its monetary base by buying up U.K. government debt.
If the U.K. does not recover and the EU fails to continue to recover, we could see a major market correction as traders who want to make money on European equities are likely to pull their money out of the U.K. and the EUR/USD. and move it back to the U.S. dollar. or onto a higher resistance.
The U.K. and the Euro would then experience a rebound once the FTSE100 Index starts to rise and the NFA begins to increase in price. With the FTSE100 Index and the NFA performing well in the U.K. and the EUR/USD breaking support, it is likely that the EUR/USD would continue to rise and remain above the U.S. Dollar. However, the NFA would then begin to decline and the U.S. Dollar would break support. This would lead to the EUR/USD closing above resistance again and a new uptrend is likely to form.
Even though the U.S. Dollar is strengthening against the Euro, investors are looking to the Forex markets for help and they are looking to the NFA for assistance. Therefore, if the EUR/USD continues to show signs of strength, we should expect the NFA to become stronger before the U.K. and the EU have recovery and begin to recover.