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Forex trading during recession: U.S. GDP undermined investor confidence and scared away buyers of risky assets

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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.



Forex

Asia FX weak, dollar steady after hawkish Fedspeak, strong labor data

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Asia FX weak, dollar steady after hawkish Fedspeak, strong labor data
© Reuters.

Investing.com– Most Asian currencies fell on Friday, while the dollar steadied from recent losses as hawkish signals from the Federal Reserve and strong U.S. labor data cast more doubts over early U.S. rate cuts.

The and both moved little in Asian trade, and were set for mild weekly losses, as they fell from three-month highs earlier in the week.

But the outlook for the greenback remained upbeat amid more signals that the Fed will keep rates higher for longer. 

Hawkish Fed comments, strong labor data further dent early rate cut bets 

said on late-Thursday that he needed more evidence that inflation was cooling, before the central bank would consider interest rate cuts.

His comments were the latest among a slew of other Fed officials who said that the bank was in no hurry to begin trimming monetary policy. The of the Fed’s late-January meeting had also reiterated this message earlier in the week. 

Waller’s comments came just hours after data showed unexpectedly fell over the past week, signaling continued strength in the labor market, which gives the Fed even less impetus to cut rates early.

The prospect of higher for longer U.S. rates bodes poorly for Asian markets, as the gap between risky and low-risk yields narrows. This notion kept most regional currencies trading lower for the week. 

The showed traders further paring back expectations for May and June rate cuts by the Fed.

Yen above 150, on intervention watch

A market holiday in Japan kept regional trading volumes muted on Friday. But the remained above the 150 level to the dollar, even as Japanese ministers offered more warnings on potential intervention measures. 

The outlook for the yen was also somewhat soured by persistent concerns over a slowing Japanese economy, after it unexpectedly entered a recession in the fourth quarter. 

Levels above 150 yen had drawn record-high intervention by the Japanese government in 2022- a trend that could be repeated again if weakness in the currency persists. 

Among other Asian units, the fell slightly amid continued focus on whether Beijing will unlock more stimulus measures to support the economy.

The shed 0.2%, while the was flat before key inflation readings due later on Friday. 

The was among the few gainers for the day, rising 0.2% as it extended a rebound from three-month lows.

The was flat but appeared to be moving further away from the 83 level. Sentiment towards India was aided by a strong reading on the service sector, released on Thursday. 

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Dollar index on track for first weekly fall this year

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Dollar index on track for first weekly fall this year
© Reuters. FILE PHOTO: A banknote of Japanese yen is seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration/File Photo

By Karen Brettell

NEW YORK (Reuters) -The was on track for its first weekly fall in 2024 on Friday as investors took a breather from buying the currency following an almost two-month rally built on expectations that the Federal Reserve will begin cutting rates later than previously expected.

Investors have pushed back expectations for the first Fed rate cut to June, from May, and dramatically reduced how far they see the U.S. central bank cutting its benchmark rate. Fed officials have projected three 25 basis point cuts this year, while markets had priced for as many as seven.

“The dollar’s rally this year has been predicated on the markets converging back to the Fed,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

Traders may also be pricing for the likelihood that economic data will begin to slow.

“I think starting with the February jobs data, which is due March 8, we’re going to begin seeing a series of weaker U.S. economic data,” Chandler said.

Personal Consumption Expenditures (PCE) due next week may also provide clues for Fed policy.

New York Fed President John Williams sees the U.S. central bank on track for interest-rate cuts “later this year,” despite stronger-than-expected readings on inflation and the labor market in January, according to an interview published Friday by Axios.

The was little changed on the day on Friday at 103.93 and on track for a weekly loss of 0.34%. It has bounced from a five-month low of 100.61 on Dec. 28 and is holding below a three-month high of 104.97 reached on Feb. 14.

The greenback has risen this year on enduring economic strength and as Fed officials caution against cutting rates too soon as they seek to bring inflation back closer to their 2% annual target.

Now, however, investors are waiting on further economic indicators for fresh clues on monetary policy.

“It’s not the time yet to sell the dollar, but we think it will start to weaken in the second quarter, assuming that the Fed will cut in June and continue cutting rates once a quarter,” said Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research.

BofA expects the euro to strengthen to 1.15 versus the greenback by the end of the year.

“If the U.S. economy remains so strong, we have to change our view, as the Fed might not be able to cut in June or not even this year,” Vamvakidis added.

Improved risk appetite that has seen stock markets set records in several countries this week may have also reduced demand for the U.S. currency, which is seen as a safe haven.

The euro was little changed on the day at $1.0822. It has dropped from $1.11395 on Dec. 28, but is up from $1.0695 on Feb. 14.

German business morale improved in February, a survey showed on Friday, though probably not enough to prevent Europe’s biggest economy from slipping into another recession.

ECB President Christine Lagarde on Friday called the relatively benign fourth quarter wage growth data encouraging but not yet enough to give the European Central Bank confidence that inflation has been defeated.

YEN WORST PERFORMER

The yen is the worst-performing G10 currency this year, with the greenback gaining 6.7% against the Japanese currency. The dollar fell 0.04% to 150.45 yen on Friday.

The Japanese currency is headed for a fourth weekly drop as investors chased better yields just about everywhere else, wagering Japan’s rates would stay near zero for some time.

With the Fed expected to hold rates higher for longer, investors are staying in carry trades in which they sell or borrow the yen and invest in higher yielding currencies.

“For the dollar/yen to weaken, we need the Fed to start cutting rates,” said BofA’s Vamvakidis.

In cryptocurrencies, bitcoin fell 1.01% to $51,122.

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Canadian dollar weakens vs. USD as spreads, Bank of Canada bets prove a headwind

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Canadian dollar weakens vs. USD as spreads, Bank of Canada bets prove a headwind
© Reuters.

Investing.com – The lost further ground against its US counterpart today, and with the greenback gaining roughly a third of a percent vs. the loonie for the week. 

Analysts at Scotiabank (TSX:) note that market drivers of loonie weakness this week include a stronger correlation with spreads at a time when spreads are working against the loonie. 

“Spreads have moved against the CAD in the past week or so, reflecting somewhat lower Canadian yields following the softer than expected Canadian CPI data, and the grind higher in US rates.” 

Canadian data this week came in cooler than expected, bringing forth bets of a Bank of Canada rate cut as early as April. Meanwhile, hawkish rhetoric and Fed minutes have set from the U.S. Federal Reserve in June. 

Scotiabank analysts also note that the past week has seen “some softening in the CAD’s linkage with stocks”, with a market rally in equities failing to lend significant support to the loonie. 

Looking ahead for the Canadian dollar, Wells Fargo (NYSE:) analysts expect the loonie’s muted performance to be “a trend that could continue for the time being”. They note that “Given a broadly similar growth and monetary policy outlook for Canada and the United States, it is also possible that Loonie could be an underwhelming performer over the medium term.” 

Wells Fargo expects a cumulative 100 bps of rate cuts from the Bank of Canada in 2024, vs. a  cumulative 125 bps of rate cuts from the Federal Reserve over the same period. They see the trading at 1.3300 by the end of 2024, with the Canadian currency set to see only modest gains.

Next week for the pair, all eyes will be on the Canadian December and Q4 GDP.  U.S.  data meanwhile will include Consumer Confidence, Q4 GDP revisions, and the Jan PCE data. 

For next week, Scotiabank’s week ahead model “suggests spot could trade between 1.3610/1.3390, with 75% confidence”.

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