Nothing illustrates the psychological aspect of Forex trading better than the fixation by market participants on nice round numbers. There can be no fundamental reason why price, time and again, comes to rest at such levels. The phenomenon can be seen very well at present in Cable, the British pound / US dollar pair, where price has been using the 1.60 level, initially as support but more recently as resistance to a move higher.
The fundamentals of the UK economy are sound, so sterling should be a robust global currency, as indeed it is relative to the Euro at present. In the US, however, economic measures are also showing marked improvement. In both cases the outstanding factor that will decide the fate of GBP/USD will be the expectation in the Forex market regarding which country will be the first to raise core interest rates.
The phenomenon of nice round numbers can also be seen on the EURUSD chart (below), where 1.25 is now the magic number.
In this instance there is a nice example of a short squeeze to be seen, which happened during the Asian session yesterday morning, the 3rd of November. Here, a large number of market participants had expected that price would not go below 1.25 and had placed their stop loss orders just below this level. When these got triggered price went into freefall for a period, before recovering to move higher.
Australian Trade Balance deteriorates while core rates kept on hold
There was plenty of news out of Australia last night (GMT). The RBA, the Oz central bank, kept its core interest rate on hold while, once again, attempting to talk down the Aussie. The trade balance deteriorated further, while retail sales improved.
Separately, the Australian statistics bureau was forced to revise its estimate of the unemployment rate, from the 6.1% it had reported earlier to 6.2%. This brought a storm of criticism from economists, central bankers and all kinds of market participants. By all accounts, there is now widespread disillusionment with the statistics on employment coming from the Australian statistics office.