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ECB Meeting & September forex volatility?

Video Script

Hi everyone,


September is historically one of the most volatile months for forex markets and it’s also on average the worst month for the stock market. In this video I’ll talk about what this seasonality could mean for currencies and stocks this September. Also on the agenda, the recent weakness in the US dollar and whether it will continue. And lastly, I’ll rundown the top items in this week’s economic calendar, including the highly anticipated ECB meeting.


Volatility moves from periods of low to high so after the slower summer months, September tends to have some of the best action. Volatility increases our risk and reward for trading - I prefer wider stop losses to control risk when currencies are moving more. The good thing about the volatility for forex trading ids that market moves just happen quicker. Instead of waiting a week for a currency to move 100 pips, it might only take a day. For the stock market, the volatility is welcome for day traders but if it means falling stocks, then that is tricky for long-only equity investors.


So why might September see some volatility this year? You don’t have to look much further than the pandemic. If cases start shooting up again in the Autumn - as they tend to do with the regular flu season - then the outlook for businesses could get cloudier. This could be compounded by concern over Fed tapering, which Jerome Powell has signalled should happen this year. Tapering QE tends to be good for the US dollar but bad for gold, riskier currencies and risky assets more broadly.


I would note that there seems little in the way of fear in markets going into September. US stock indices are at record highs and in the last week of August the dollar fell to 3-week lows with commodity currencies like the NZD, AUD, CAD as top risers. If the Fed are going to taper, it seems likely they leave it until December. So before then, if this dollar weakness is to continue, it will need the current risk-on mood to continue, which as I just mentioned - is no guarantee in September.


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OK let’s round off with the economic calendar. It will likely be a slow start to the week with Americans away from the markets enjoying their Labour Day holiday. Afterwards though, the action will return with 3 big central bank meetings and US inflation data. The ECB is the big one. Eurozone inflation came in at is hottest in 10 years in August and ECB hawks are taking notice. It’s very unlikely we hear any direct mention of tapering from the ECB, but a hawkish shift could be euro-positive.


The RBA is scheduled to start tapering asset purchases this month but given the lockdowns across Australia, the consensus in markets is that tapering gets delayed. Watch out for another hawkish surprise.


Given that a national election is being held in Canada in 3 weeks, the Bank of Canada will be keen not to cause any sensation at this week’s meeting. It’s also noteworthy that Canadian GDP unexpectedly declined in Q2 and in July- another reason for the BOC to hold off on policy tightening, which should be CAD-negative. Lastly there’s US inflation data, where expectations are that we ease-back from a 13-year high of 5.4% year-over-year.


Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.


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