Forex
Forex trading during recession: U.S. GDP undermined investor confidence and scared away buyers of risky assets
Important news for capital forex trading. The euro and the pound rose, while the dollar lost all its ground after the recessionary drumbeat of the US economy got louder. The other day a report came out showing that the US economy contracted for the second quarter in a row amid a sharp drop in consumer spending and interest rate hikes by the Federal Reserve. However, do not rush to buy Euros and British Pounds, as nothing good is about to happen anytime soon for you to really talk about a rise in market sentiment.
Forex trading during recession
According to data from the Commerce Department, gross domestic product fell 0.9% year-on-year after a 1.6% decline in Q1. Personal consumption, the biggest part of the economy, rose only 1%, less than in the previous period.
This data added headaches not only for the Federal Reserve but also for President Joe Biden, whose political career is now in jeopardy. In addition to the slowdown in household spending, the report also showed a decline in business investment, a drop in government spending and a drop in home prices. Inventories also had an impact on GDP, and only the narrowing trade deficit had a positive effect on the indicator.
The key core demand indicator, which excludes trade and inventory components, fell 0.3% in the second quarter, compared with an increase of 2%.
Quite expectedly, high inflation undermined Americans’ purchasing power, and the Fed’s tighter monetary policy weakened an interest-rate-sensitive sector such as housing. The contraction of the economy for the second quarter in a row clearly indicates that the U.S. has already entered a recession, and the question now is not when, but how long it will be observed.
Economists had expected GDP growth of 0.4% and an increase in consumer spending of 1.2%. The data also showed that spending on services accelerated to an annualized rate of 4.1%, while spending on goods declined 4.4%. Housing investment fell 14% year-over-year.
The situation on the currency market: the disadvantages of forex trading
This is definitely putting pressure on the US dollar, but it is hard to say how much longer we will see the euro and the British pound rising vigorously. The euro zone economy is one step away from recession, as is the UK economy, where the ongoing struggle with the cost of living crisis on the back of high inflation continues. Eurozone consumers have yet to face the sharp rise in interest rates that the European Central Bank began this month. The difference between forex trading and stock trading can be clearly seen in what is happening. It is much harder to make predictions here.
What will happen to forex trading during a recession? The fixing of the Euro at 1.0170, gives buyers of risky assets an excellent chance. Now, the whole focus has shifted to the nearest resistance, 1.0220. The break-up of this range will give confidence to the buyers of risky assets, which will open a direct way to the high at 1.0273, which defines the further uptrend of July 14.
Breakdown of 1.0273 will open the possibility of updating to 1.0320 and 1.0370. In case the Euro declines, it is very important for buyers to show something around 1.0170; otherwise the pressure on the trading instrument will only increase. If you miss 1.0170, you can say goodbye to hopes of recovery, which will open a direct way to 1.0130 and 1.0090. Break-through of this support level, probably, will increase the pressure on the trading instrument, opening the possibility of a return to 1.0040.
The pound is at the new local highs and the most important thing is to hold the support at 1.2200 today. If it succeeds, we can expect a larger movement of the pound upwards and speak about updating from 1.2250, with further exit at 1.2285 and return to 1.2330. A break through this range will easily take the pound back to 1.2400. If 1.2200 is empty, we are likely to correct heavily to 1.2160, with the prospect of a test of the larger 1.2110, where the bottom of the current rising channel passes.
Forex trading disclaimer: Remember that when you make decisions in the currency market, you must make your own decisions and not listen to others’ calls to action.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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