Markets this week have once again been sending mixed signals, though perhaps not as severe as the crash in precious metals last week. Gold rose above $5,000 per ounce but was unable to hold the gains. Silver rose, only to crash again. Stock markets are underperforming, and Bitcoin fell for the fourth month in a row. All of these point to some worrying signs in the market.

One issue particularly relevant for forex traders is sudden shifts in risk appetite, which can cause unusually large fluctuations in asset prices. One of the main selling points of forex trading is its relative stability, with currencies not experiencing wide swings over short periods. The current circumstances mean that forex traders need to pay extra attention to their strategies, fine-tune stop losses, and monitor the news closely.
 

Why All So Many Fluctuations

One of the themes in financial markets going into February is concern over risk and exposure. After gold’s price skyrocketed in January only to crash by the end of the month, it became clear that the market was being driven by retail traders. Analysts noted large inflows to ETFs from China and Hong Kong.

Retail traders tend to be particularly risk-prone and overly optimistic, and gains in certain popular assets could offset a broader market shift. At the same time, precious metals have been volatile, tech stocks have underperformed, and bitcoin has fallen for four months straight.
 

A Decline in Tech Affects Forex Markets

Institutional investors had been piling into AI-backed tech stocks for the last couple of years, leading to a meteoric rise in the stock market. Now, they are showing signs of nervousness and looking to move funds out of stocks and into money markets. Tech stocks have reached valuations not seen since the last major financial crash, with many likening the AI boom to the dot-com bubble.

One common store of value is gold, but the wild swings in the yellow metal make it less attractive to investors seeking to reduce risk. This means they could be attracted towards major currencies, such as the Euro and the dollar.
 

Europe’s Debt Problem

Investors would seem to prefer investing in the Euro, as it offers greater institutional stability, and EU officials are trying to position it as the global reserve currency. However, large holders don’t buy currency; they buy debt, so that the value of their holdings isn’t eroded by inflation. The problem is that the EU has relatively little debt outstanding, which makes it hard to come by and reduces yields. The lower return on investment makes it less attractive, particularly since traders prefer “northern” bond issuances and want to avoid a repeat of the Greek situation.

Enter, again, King Dollar, which has an ever-growing pile of issued debt, which means it remains highly liquid. With the new Fed Chair promising to get the central bank out of the debt market, that could mean there is even more dollar liquidity available. Assuming no major market crash, it could be an opportunity for the greenback to recover.

On the other hand, the large fluctuations in silver, gold, and especially bitcoin signal that investors are short on cash. This could provoke a liquidity crunch and tip the market lower. Whether that will be a correction or a crash, time will tell.

More By This Author: