Forex market conditions are very much improved on the week, with average interbank bid/ask spreads on the Euro/US dollar currency pair falling sharply on the week’s trade. Extreme financial market instability led to pronounced illiquidity across all traded assets, and interbank bid/ask spreads on the EURUSD widened to their worst in at least a year. Yet early signs point to improvement in forex markets, and average EURUSD spreads dropped considerably through very recent trading.
The chart below shows Bid/Ask spreads available in FXCM retail trading accounts for the past 16 months. Since FXCM uses prices provided directly by the world’s major institutions’ currency dealing desks, this is an accurate picture of spreads available in interbank markets. FXCM markups are accounted for in the below spreads.
Forex market volatility remains elevated, with increased uncertainty surrounding US Treasury plans to purchase distressed assets from increasingly fragile credit markets leading to similar uncertainty in the US dollar against major forex counterparts. Yet we see that key forex bid/ask spreads remain only slightly above their typical levels, and the immensely liquid FX market seems willing to cope with the risk of further fallout from broader financial instability.
What’s Next for the Forex Trader?
The clear improvement in forex market conditions on the week gives us hope that we may continue to see broader financial market conditions stabilize. Yet we will clearly monitor market conditions as they develop. A cursory look at expected volatility in the EURUSD for the week ahead shows that traders are already scaling back expectations of sharp price moves, but it remains to be seen whether we can see conditions continue to improve given broader financial market indecision.
Written by David Rodríguez, Quantitative Analyst for DailyFX.com
To contact the author of this report, e-mail drodriguez@dailyfx.com 
Forex Market Liquidity Improves - What Happens Next?
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