With the 2024 U.S. election results released, forex traders are paying close attention to see if the market might take a slight dip amidst other significant global events. While a market correction isn’t a cause for alarm (since it happens all the time), anticipating it can save you a lot of hassle.
Let’s look at some of the indicators that experts are monitoring to predict if a market correction is upon us as we approach the end of the year.
Understanding Market Corrections
If someone asked you what “correction” meant, you’d probably say it is the act of fixing an error or inaccuracy, and to your credit, you would be 100% correct. However, in the world of online trading, a market correction means something a little different: it refers to a 10%–20% decline from a recent high that lasts for a few days to months before picking up again.
These dips in the value of a currency or group of currencies happen regularly and are a normal and healthy part of the market’s cycle. It is sometimes confused with a bear market, which describes a 20% or more decline from a high that can last for months or even years. They are not the same.
Historically, bear markets have been known to follow market corrections, but not very often. For example, in the stock market, the S&P 500 has experienced 27 market corrections since the 1940s. However, there have been only 12 bear markets.
In this quarter, some Forex pairs, particularly those involving the U.S. dollar, have shown some level of volatility as new fiscal policies and global economic uncertainties emerge. All these point to a possible change in the trend and market structures of USD-based currency pairs. After Donald Trump won the election, the stock market responded positively, and the dollar index (DXY) remained in a trading range. But what does this mean for interest rates and inflation numbers?
Inflation and Interest Rate
When you trade in the Forex market, inflation and interest rates are two big things that you tend to watch closely. High inflation can cause a currency to lose its value, while a high interest rate often makes a currency stronger. This is why experts are paying really close attention to news from various central banks about how they plan to control current levels of inflation and their plans for interest rates.
One such major interest rate change came in late September 2024 from the Chairman of the Federal Reserve, Jerome Powell, who, for the first time in four years, announced a lowered interest rate of 50 basis points with the aim of stabilizing inflation. Projections also indicate that by the end of 2024, rates may fall another half a percentage point from the current level of 4.75%–5%. An additional percentage-point drop is also expected through 2025.
Volatility Index (VIX) Spikes
The CBOE VIX, also known as the “fear gauge,” is a tool used to estimate the level of anxiety present in the market. It informs investors about market sentiment and how the market feels about the value of a currency. When there’s a high VIX, it means people are feeling nervous and expect a significant price swing. On the other hand, a low VIX tells a story of investors who are confident in the market’s stability.
A recent report from several online trading platforms and resources shows that the value of the fear gauge is climbing. Recently, it rose by about 10% to 22%, which is well above its long-term average of 15. This could serve as an early indicator of possible market corrections across various currency pairs, especially those with the majority of trading volume, like USD, EUR, and JPY.
Domestic, Middle East, and Global Tensions
In the past, global tensions and war have tangibly impacted the USD and its influence on the global market. With the present conflicts in Europe and the Middle East, as well as a market just recovering from the devastating effects of the COVID-19 pandemic, analysts and investors are speculating that the market is primed for a slight change in direction.
A more recent development to this effect is the result of the 2024 U.S. election. In the early hours of Wednesday, November 6, 2024, the USD saw remarkable gains against its major currency pairs (EUR, GBP, and JPY) as the election results were announced, declaring Donald Trump the 47th president of the United States.
This shows how political sentiment plays out in the online trading space, where real-time access to currency fluctuations allows investors to respond immediately to global political developments.
The Role of Retail Investors
Since the early 2000s, individual investors have significantly impacted the stock and Forex markets. Social media platforms and trading apps have empowered the average retail investor to make decisions (based on sentiment) that influence the direction of various stocks, giving rise to “meme stocks.” The influence of this market is no joke, as retail investors are now included in the FX market statistics provided by the Bank for International Settlements (BIS).
Although these “meme stocks” are relevant in today’s global market, the novelty and excitement that once fueled them are fading. Now, many retail investors are taking a more cautious approach to trading. This shift has caused the market to see a drop in trading volumes of these highly volatile stocks and a move toward more stable assets within the market.
This change in how retail investors behave, especially during a period of volatility like this, could be a useful indicator of a potential market correction before Q1 of 2025.
Global Currency Shifts and the U.S. Dollar’s Dominance
In the second and third quarters of 2024, the Japanese yen traded weakly against the U.S. dollar, reaching multi-year lows. This was primarily due to the Bank of Japan’s (BoJ) relaxed monetary policy, which was in stark contrast to the Federal Reserve’s decision to tighten measures on monetary policies. As a result, the weakness of the Yen indirectly strengthened the value of the dollar, adding gains to its recent momentum.
The already strengthening USD also saw remarkable gains against its pairs as Trump won the election on November 6, 2024. A future Trump administration also promises to implement tariffs, tax cuts, and other monumental fiscal policy changes, which can affect the dollar’s standing in the global market.
Given these developments, traders are weighing the dollar’s current dominance, emerging and rumored policies surrounding the currency, and recent shifts in favor of the dollar in its trading pairs to infer a potential correction.
Final thoughts
Market corrections are hard to predict, but historical corrections, economic trends, the VIX, geopolitical factors, and currency shifts are strong pointers to an impending market correction. As uncertainties continue to increase globally, staying informed on these factors can provide Forex traders with critical insights, especially in the fast-paced world of online trading. Whether a correction happens this quarter or later, caution remains the best approach.