Forex Focus: Fed to cool on rate hikes, USD still strong
It has been a tumultuous year so far in forex markets. High-interest rates and inflation continue to keep traders on edge.
Many found reason to hope for a turnaround following the US Federal Reserve’s announcement that it could reduce the pace of interest hikes.
Unfortunately, this did little to calm investors and markets haunted by the spectre of high inflation and interest rates.
Today we take a look at the FX market and see the effects of high inflation on global currencies as we move towards the end of the 3rd quarter of 2022.
Inflation – enemy no.1
Central banks around the world point still point to rising prices as enemy No. 1 to the global economy. Yet high inflation and higher borrowing costs are negatively affecting growth in most developed economies.
To curb rising inflation, banks have had to raise interest rates. This unfortunately has the dual effect of slowing economies and hurting consumer spending.
Consumers will bear the brunt of high inflation and escalating prices until things normalize in the economy. High borrowing costs are also affecting most Forex trading markets; many countries are reporting a lack of USD and many citizens are having issues withdrawing their hard-earned funds.
US Dollar Index on a high
The US Dollar Index registered its highest daily close in a month on August 18. Though the market remains cautious, the US dollar continues to outperform its rivals.
The European index, Eurostat, is set to release the final version of its July inflation data. It’s not expected to show any changes to the estimate of 8.9%.
The US dollar finished August 17 higher against most major rivals, despite suffering a near-term setback due to the latest Federal Open Market Committee (FOMC) Meeting.
The greenback had a minor setback as US policymakers unanimously agreed to hike rates by 75 bps. The Fed believes that a slowing pace of hikes will occur at some point.
Many firms and banks are worried that the Fed could tighten more than necessary. Alarmingly, the FOMC said the policy rate would have to reach a “sufficiently restrictive” level to control rising inflation and remain there “for some time.”
FX and market snapshot
The USD posted modest advances against safe-haven currencies, with USD/CHF finishing around 0.9510 and USD/JPY at 135.00.
The EUR/USD pair posts modest intraday gains to settle around 1.0180. The GBP/USD pair remained under pressure to finish at around 1.2050.
Commodity-linked currencies performed the weakest in the trading; the AUD/USD traded around 0.9630 and USD/CAD just above 1.2900. The NZD/USD dropped to 0.6270,
Gold extended its downward slide to $1,765. Crude oil prices spent the day consolidating losses; by August 7 WTI rose to $89.36 a barrel while brent surged to $95.17.
“For trading forex, you can apply any kind of strategy as would with any asset. It helps you to understand the markets you’re working with and their specific economic conditions.
Oil to stay above $100?
Danske Bank expect oil prices to trade above $100 for the rest of 2022. A stronger USD, weaker global economy and potential new suppliers to the oil market could push the price of oil higher.
Commodity traders could look forward to consistent prices above $100/bbl for the remainder of 2022 before sliding below $95/bbl in 2023.
Top Forex trading questions answered
Fred Razak, CMTrading’s Senior Trading Specialist, shares his thoughts on the foreign exchange market in August:
Here are my top 4 tips for trading forex symbols:
1 Trade the technicals
Technical analyses always work when it comes to foreign exchange. Don’t try to beat the market – don’t try to do something outside of trading technicals with the forex symbols, it generally doesn’t work.
2 Cut your losses
Don’t let your losses get too far because sometimes they don’t, they don’t come back. You must be sure to catch your losses at the quickest time possible. Proper risk management processes will greatly assist you in trading FX.
3 More factors than just currency pairs
You need to understand that there are so many factors that go into currency trading so it’s not just one factor that affects everything. It’s an Intermarket analysis, you can’t just look at it in a bubble. Everything affects everything. If you’re trading the US dollar versus the Canadian dollar – the Canadian dollar is very much tied to the price of oil, so if oil is doing well the Canadian dollar is doing well. The point is to do your homework before trading.
4 Don’t trade in a vacuum
Currencies affect each other. Trading them together means considering the Intermarket analysis. The USA affects Europe which will affect China. Consider the political situations of the countries you’re trading and their effect on the FX market.
Q: Is a global recession still likely?
I think a recession is not just a possibility but it’s inevitable. Just the value of the dollar disintegrating and the inflation rate is just way out of control points to it. We might not have felt it on Wall Street yet but you know there is a recession that we’re in already. It’s just a matter of time until you know the rest of the world catches up with it.
We’re not in a particularly good situation right now in the financial markets. This could snowball I mean you see certain countries with their high inflation rate and it’s just a matter of time until we hit the tipping point.
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