Forex

Measuring The Vital Importance Of Market Sentiment In Trading And Forex Analysis

Published

1 year ago

June 22, 2023

While forex trading has evolved into a highly analytical ecosystem, the market is still governed largely by the sentiment of traders. With technical analysis often having to operate alongside fundamental analysis like breaking news and market jitters, the psychological impact of FX must always be at the core of a trader’s strategy. Trading psychology may be a broad term, but it remains very much in play throughout both market rallies and downturns, and manifests itself in the performance of different currencies and trading pairs. In the present day, where severe economic headwinds are continuing to wreak havoc with the performance of many international currencies, market sentiment can play an even greater role in rallies and corrections as fearful traders look deeper for signs of FOMO (fear of missing out) or possible changes in the geopolitical landscape. As the Federal Reserve continues to weigh heavily on the performance of the dollar, FxPro senior market analyst Alex Kuptsikevich has noted that the chances of further interest rate hikes in the wake of the Fed’s June 13-14 meeting weigh in at around 64%. This, Kuptsikevich believes, has pushed USD into overbought territory, which makes its performance in the face of psychological barriers fascinating from a sentiment standpoint. Finding A Pivot Through SentimentUsing the current performance of the US dollar as an example, we can see the impact of both technical analysis and fundamental analysis in anticipating future price movements. By exploring the Relative Strength Index (RSI) indicator on the USD Index hourly chart, we can see that the dollar is currently ranging between 50 and 60, following a technical correction that saw the currency decline from a push that reached a peak of 70. This would suggest a technical correction as opposed to turning bearish. Looking to the index itself, we can see that USD is generally remaining within the parameters of 104, with brief dips towards 103. For the 104 level, we can see a 23.6% Fibonacci retracement of a November-February downtrend for the dollar, but it’s the question of what happens at 105 that will see market sentiment come into play for traders. Writing for FX Street, Eren Sengezer highlights that the continued use of 104 as a support level could keep buyers interested, while noting the bullish cross formations that have appeared in the 20-day and 50-day Simple Moving Averages (SMAs) points to a potential upward trend. However, Sengezer notes that 105 will be a major hurdle to contest with. Crucially, the analyst suggests that 105.60 will be a major pivot level for USD to overcome, citing a 200-day SMA and Fibonacci 38.2% retracement. However, Sengezer also claims that 105 makes for a significant hurdle on a psychological and static level. So why does psychology often come into conflict with technical trends? Psychology As The Cornerstone To SentimentPublishing their article in Cuadernos de Economía in 2017, Júlio Lobãoa and Cristiano Pereirab examine the existence of psychological barriers at round numbers in the major stock market indices.Logically, a round number should carry no more relevance than any other level when it comes to technical analysis in forex. However, Lobãoa and Pereirab found that these ‘psychological barriers’ can impact financial markets in different geographies and asset classes. These psychological barriers occur because of many behavioral biases and the subsequent difficulty in making rational decisions among traders. The authors add that the impact of this phenomenon often affects the average market practitioner in either a direct or indirect manner. “It is also interesting to notice that the markets that are more volatile–in our sample, the Greek market and, to a lesser extent, the Portuguese and Spanish markets – are the ones that exhibit greater indications of psychological barriers,” Lobãoa and Pereirab add.This strongly suggests that the current forex market for key currencies like the dollar, which has been subject to much volatility throughout many months of considerable economic headwinds, is more susceptible to these psychological hurdles. Furthermore, traders should be aware that these psychological barriers can form the cornerstone to changes in market sentiment, and as FX markets continue to hang on every statement issued by the Federal Reserve, we’re seeing psychology impact the decisions of traders in a more comprehensive manner. Changing Sentiment and The FedLooking closer at USD, we can see how fundamental analysis can bring rapid changes in investor sentiment. Taking the US Federal Reserve’s vote to increase interest rates to a 16-year high on May 3rd, we saw a strong reaction in the performance of the dollar. Using a regression channel to explore the extent of the decline and MetaTrader 5’s new terminal within a USD/CAD trading pair, we can see that the dollar’s strong end to May has only represented a recovery from the initial shock of the announcement. The quarter-point increase in the Fed’s benchmark interest rate represented the 10th hike of its kind since March 2022, when interest rates were at zero and the Federal Reserve opted to step up its battle against soaring inflation in the US. With inflation rates reaching highs that haven’t been seen for 40 years, interest rate hikes have long been seen as inevitable by the markets. However, now consumers are beginning to see the pinch kick into action, there had been some optimism that we were approaching the end of these consistent rate rises. It’s because of this uncertainty that left the prospect of another .25 hike hanging in the balance, and its impact unaccounted for by investors prior to the event. In late May, Federal Reserve president James Bullard claimed that two more rate hikes, preferably coming “sooner rather than later” are required to ensure that these record-breaking inflation rates are stamped out successfully. “I think we’re going to have to grind higher with the policy rate in order to put enough downward pressure on inflation,” Bullard explained. “I’m thinking two more moves this year, not exactly sure where those would be. But I’ve often advocated sooner rather than later.”For forex traders, the opportunities that this announcement can bring are vast when considering their impact on market sentiment. Whether Bullard’s intentions are for another rate hike to emerge at the next meeting on June 13th or later is yet to be determined, but for traders mindful of the changes in market sentiment that this can bring, it’s possible to study the fundamental analysis charts as new announcements are due and to operate on a field of play that transcends technical performance. As more volatility and uncertainty are set to reign supreme, market sentiment becomes more valuable as a fundamental indicator. In understanding the value of psychology among investors, it’s possible to add greater intelligence and strategy to positions.

Forex

Asia FX rises as rate cut dents dollar; yen firms as BOJ holds course

Published

3 hours ago

September 20, 2024

Investing.com– Most Asian currencies firmed on Friday, while the dollar nursed losses after the Federal Reserve cut rates by a wide margin and kicked off an easing cycle.

The Japanese yen was among the better performers, strengthening after the Bank of Japan held interest rates and said it expected steady increases in inflation and economic growth.

The Chinese yuan also firmed after the People’s Bank of China kept its benchmark rates unchanged, ducking some expectations that it would cut rates to further support the economy.

Yen firm as BOJ holds rates, flags higher inflation

The Japanese yen firmed on Friday, with the pair falling 0.2% to 142.28 yen.

The BOJ in a unanimous decision, and said it expected inflation and economic growth to steadily increase.

While the central bank did not provide any overtly hawkish cues, its forecast of higher inflation tied into expectations that the BOJ will raise interest rates further. A slew of policymakers had signaled that rates will rise further in the coming months, especially as inflation picks up.

The BOJ decision and forecast came just hours after data showed inflation rose to a 10-month high in August, as increased wages pushed up private consumption.

While the yen was nursing weekly losses, it still remained close to its strongest levels for 2024, hit earlier in the week. Expectations of higher interest rates are likely to underpin the yen in the coming months.

Dollar weak after rate cut cheer offsets less dovish Fed signals

The and both fell slightly in Asian trade, extending overnight declines as markets looked to lower U.S. interest rates.

The Fed and announced the start of an easing cycle, which could see rates fall by as much as 125 bps by the year-end.

But Fed Chair Powell offered a less dovish outlook for medium-to-long term rates, stating that the central bank’s neutral rate will be much higher than seen in the past. His comments limited overall losses in the dollar, and had also seen the greenback appreciate in the immediate aftermath of the Fed decision on Wednesday.

Chinese yuan at 16-mth high as PBOC holds rates

The Chinese yuan firmed on Friday, with the pair falling 0.3% to its lowest level since May 2023.

Strength in the yuan came as the PBOC kept its benchmark steady, ducking some expectations that it would cut rates further to stimulate the economy.

The PBOC’s decision came even as a raft of recent economic indicators showed sustained weakness in China.

But media reports said the PBOC was instructing local banks to buy dollars and limit overall strength in the yuan, given that a stronger yuan also weighs on Chinese exports.

Broader Asian currencies firmed after the Fed’s decision. The Australian dollar’s pair rose 0.2% and was close to an eight-month high.

The South Korean won’s pair was an outlier, rising 0.2%, while the Singapore dollar’s pair fell 0.1%.

The Indian rupee’s pair fell 0.1%, pulling back further from record highs hit earlier this year.

Forex

Stay long on the yen amid rate hikes, improving growth- BCA

Published

3 hours ago

September 20, 2024

Investing.com– BCA Research said bets on a stronger Japanese yen were becoming more entrenched amid attractive valuations in local assets, the prospect of more interest rate hikes and an improving Japanese economy.

The yen saw a stellar recovery over the past two months, as a hawkish Bank of Japan, a weaker dollar and an unwinding carry trade pushed the currency to 2024 peaks. The pair had fallen as low as 139 yen in recent weeks.

BCA Research said in a recent note that the yen was a “high-conviction” buy, and that interest rates and global economic conditions were likely to favor the currency in the coming months.

BCA expects the BOJ to this week. But a “dovish hold” is an opportunity to accumulate more yen, while an unexpected rate hike is set to further boost the currency.

The research firm said the Japanese economy remained resilient, with increases in local wages helping spruce up private consumption.

With the Federal Reserve beginning an easing cycle, and with the BOJ likely to hike interest rates further, BCA sees interest rate differentials still moving in favor of the yen in the long term- more so if the global economy enters a recession.

BCA expects Japanese inflation to rise further in the coming months, tieing into the BOJ’s forecasts and giving the central bank more headroom to raise interest rates. The central bank hiked rates twice so far this year, ending years of easy monetary policy on expectations of an uptick in private consumption and inflation.

While the BOJ is expected to keep rates on hold in the near-term, especially with a looming leadership change in the Japanese government, it is still expected to keep raising rates by end-2024 and going into 2025. BCA said an interest rate hike will “not hurt Japan.”

On Japanese equities, however, BCA was less enthusiastic, rating them as “structurally neutral.” The firm cited yen strength as a headwind, and saw no immediate positive developments in ongoing corporate governance and structural reforms.

Forex

Dollar slips in choppy trading as traders grapple with Fed’s giant rate cut

Published

3 hours ago

September 20, 2024

(Adds missing “cuts” in first bullet, no other changes to text)

By Chibuike Oguh and Stefano Rebaudo

NEW YORK (Reuters) – The U.S. dollar slipped in choppy trading on Wednesday as markets grappled with the supersized 50 basis point interest rate cut, as well as the switch to an easing monetary policy stance delivered by the Federal Reserve.

Investor expectations had largely shifted towards a dovish outcome in the days leading up to the Fed’s move on Wednesday, with money markets pricing in around a 65% chance of a 50 basis point (bp) cut. But economists polled by Reuters were leaning towards a 25 bp cut.

“The interesting thing is the half point cut, which was pretty much unexpected or at least only half and half yesterday, has not really given the dollar extra damage – which is quite surprising,” said Joseph Trevisani, senior analyst at FXStreet in New York.

The , which measures the greenback against a basket of six peers, was down 0.38% to 100.64 after reversing gains made in early trading. It slid to its lowest in more than a year of 100.21 in the previous session.

The euro strengthened 0.4% to $1.1163. Against the yen, the dollar was 0.33% higher at 142.73 as markets anticipate that the Bank of Japan will leave interest rates unchanged on Friday.

The dollar weakened 0.08% to 0.847 against the Swiss franc and dropped 0.34% to 7.070 versus the offshore .

“What it’s really doing I think is giving permission, if you will, for the other central banks around the world, some of whom have started to cut rates already, to go further with their rate cuts,” Trevisani said.

Money markets priced in 72 bps of additional rate cuts in 2024 and 192 bps by September 2025.

The U.S. Treasury yield curve, which measures the gap between yields on two- and and seen as an indicator of economic expectations, steepened and hit its highest since June 2022. It was last at a positive 13.4 basis points, indicating more upcoming rate cuts.

Initial claims for state unemployment benefits dropped unexpectedly to 12,000 last week, according to Labor Department data on Thursday, suggesting labor market growth.

Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026.

“The initial interpretation of the decision was that it was dovish and while it was basically even odds that it was going to happen, overall, on the surface, it’s still a dovish move,” said Eugene Epstein, head of trading & structured products North America at Moneycorp in Boston.

“Everything reversed basically by the end of the day, so you can make the argument as a bit of buy the rumour, sell the fact. A lot of dovishness was already priced in.”

The pound hit its highest since March 2022 versus the dollar after the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to keep rates on hold. Sterling was up 0.5% against the greenback at $1.3278 after reaching as high as $1.3314.

The Australian and New Zealand dollars drew support from domestic data surprises. Australian employment exceeded forecasts for a third straight month in August.

The was up 0.77% to $0.6815.

The , meanwhile, traded 0.58% higher at $0.6244, after data showed the New Zealand economy contracted by 0.2% in the second quarter.

Currency bid prices at 19

September 07:17 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 100.62 101.02 -0.39% -0.74% 101.47 100.51

Euro/Dollar 1.1162 1.1118 0.4% 1.13% $1.1179 $1.1069

Dollar/Yen 142.61 142.3 0.22% 1.11% 143.875 141.885

Euro/Yen 1.1162 158.18 0.64% 2.29% 159.96 157.79

Dollar/Swiss 0.8469 0.8463 0.06% 0.62% 0.8515 0.845

Sterling/Dollar 1.3276 1.3214 0.51% 4.37% $1.3314 $1.3155

Dollar/Canadian 1.3559 1.3606 -0.34% 2.29% 1.3648 1.3534