In Forex online trading, the dollar slumped against most major currencies on Monday as investors bet that a raft of key US data this week will show the pace of US inflation and consumer spending cooling off.

This comes as economies in Europe are picking up steam, which could be given a further boost this week by interest-rate cuts.

Forex online trading: US inflation in focus

The dollar’s rally year to date was fuelled by the US exceptionalism narrative: as much of the rest of the world languished after the pandemic, the US was in the lead.

However, the narrative has shifted since June, after the Federal Reserve’s chairman Jerome Powell suggested in a press conference after the central bank’s June 14-15 meeting that interest rates could be cut by 25 basis points as soon as September, with a December cut possible as well.

Forex online trading: ‘Sticky inflation’

This was a remarkable pivot for the Fed after months of predictions that it would see the need to ratchet rates higher to tame so-called ‘sticky inflation’.

Forex online trading: Core CPI up

Core CPI is forecast to have climbed by 0.3% on the month in April, down from 0.4% the prior month.

Despite the expectation for inflation to decelerate, Fed Vice Chairman Phillip Jefferson on Monday made clear he believes rates should remain on hold until it becomes clear that price pressures are easing up.

Meanwhile, data on core and headline consumer price inflation is out on Wednesday, before industrial production numbers become available on Thursday.

Markets have priced in an almost 80% chance of a rate cut by the time of the Fed’s September meeting, while total rate reductions for this year are currently seen at just under 44 basis points (bps), LSEG data shows.

Fed officials’ comments last week ranged from ‘nothing close to enough, and more hiking is ahead’ to views that rates might now be ‘sufficiently restrictive’.

And the uptick in the percentage of consumers expecting inflation to increase over the next 12 months, revealed in a Friday survey, means the policy discussion is unlikely to end any time soon.

Forex online trading: US economy affecting Forex

If the economy is, as recent figures have suggested, slowing a bit from the torrid pace seen in 2023, investors still want confirmatory evidence of inflation’s persistence.

The dollar index, which tracks the US currency against a basket of six peers, was down 0.24% to 105.08, while the euro climbed 0.33% to $1.0804. Sterling rose 0.31% to $1.2625 ahead of labour market data to be published on Tuesday.

Traders in forex online trading are still wary of the yen, as Japanese authorities have been known to intervene in the currency markets.

The dollar climbed back against the yen after a hefty 3% drop earlier this month – its biggest weekly drop since late last year – as speculation grew that Japanese authorities intervened in the currency market to strengthen the yen.

The dollar was 0. 1% higher against the yen at 155.88.

Forex online trading: China Yuan

China’s offshore yuan was up 0.05% to 7.2378, with the onshore yuan falling to the weakest level since 30 April, at 7.2274, as traders geared up for new US tariffs on China.

The People’s Bank of China announced that new bank lending in April came in lower than expected, while broad credit growth hit a record low. Separate data showed Chinese consumer price indexes rose in April, while producer prices declined.

Bitcoin was up 4.15% at $62,991.00.

Forex online trading: Yen, Dollar & Yuan

These developments signal a possibility of a changed playing field between the dollar, yen and yuan for those engaged in forex online trading.

All three currencies are in a state of flux, and the Fed’s expected rate cuts show that the forex online trading market keeps changing, and strategies must be adjusted accordingly.

If financial markets are right about this, interest rates won’t merely be higher this year than they were in 2022.

They might remain high for decades. Inflation’s return means the era of ultra-low interest rates is over.

Financial markets now price in a world in which even the so-called neutral rate of interest, calculated by economists as ‘R-star’, the rate that balances the economy in the long run in real terms after subtracting inflation, is moving higher.

Forex online trading: US rate priced in

In forex online trading circles, US rates are now being priced to reach 4% by the end of the decade, well above policymakers’ long-run expectation of 2.6% – while those for the euro area are priced at an even better will ultimately settle?

For both policymakers and investors, R-star’s current location is more than a mere matter of academic interest Given all that, it’s not surprising that views differ on the question of R, or even R-star.

Most economists suppose it lies below its pre-great financial crisis level – but not everyone thinks that; fewer people have a view on how it is measured or its precise level, and fewer still agree on whether it is indeed rising.

Forex online trading: Top 5 economic indicators

Five things to watch to see where long-term interest rates are headed next are outlined below.

This is important for you if you trade forex online.

Government Borrowing: Big spending – on climate subsidies and armaments, and on rising interest costs – will keep lots of governments borrowing.

Advanced economy budget deficits of 5.6% of output in 2023 were nearly double the 3% in 2019 and will remain elevated at 3.6% in 2029, according to IMF projections.

Demographics: Another key uncertainty is the elderly. There’s consensus that a savings glut, including the buildup of pre-retirement savings in rich countries, helped to drag down rates.

That trend might continue: 16% of the world’s population will be over 65 by 2050, up from 10% in 2022, according to the United Nations.

However, the rising ratio of dependents to workers seems to suggest rates could rise, as age-related spending reduces the savings pile, the economists Charles Goodhart and Manoj Pradhan argue.

And meeting pension shortfalls through borrowing would also put upward pressure on rates, Nomura pointed out.

Climate Change: The next challenge involves the economic effect of climate change: the green transition requires a lot of investment, which might push rates higher, as Isabel Schnabel of the European Central Bank warned.

The physical impacts of global heating also carry the risk of higher inflation and price volatility that will drive down global output by up to 17% by 2050, according to an IMF estimate.

Over time, pricier clean energy (for example) would reduce investment demand and in turn rates, the IMF argues. ‘Whether climate change is going to impact rates is a big open debate,’ says Soeren Radde, head of European economic research at Point72.

Technological innovation – namely, the artificial intelligence (AI) revolution – is another topic of intense debate. According to Goldman Sachs, an AI-induced productivity boost could raise US growth by a robust 0.4 percentage points, and by 0.3 points elsewhere among developed countries, putting upward pressure on rates.

Vanguard, however, warned that AI could fall short of expectations if it plays out like the revolution from computers and the internet rather than being more disruptive, like electricity itself.

Forex online trading: Geopolitical risks

Geopolitical Risks: From COVID-19, to the wars in Ukraine and Gaza, to the U.S.-China trade tensions, there is a possibility that we face higher supply-shock risks in the years to come.

A continuation of that, Radde of Point72 told me, implies that ‘if the central banks have to lean against those shocks, it will lift the average level of interest rates.’ ‘Friendshoring’ – the tendency for Western countries and companies to trade with allies rather than China – would be more inflationary due to higher costs, said William Davies, global chief investment officer at Columbia Threadneedle.

To forex online trading participants, all these factors are very important to monitor since they inform how long-term interest rates are determined and, in turn, what might be the next movements in that direction.

Turkey will slash public spending and improve efficiency with a savings plan announced on Monday, focusing on state investment projects to shore up confidence in an economic tightening programme that aims to address years of economic turmoil and runaway inflation.

Vice President Cevdet Yilmaz and Finance Minister Mehmet Simsek laid out the details of the new plan, under which Turkey is moving toward more orthodox policies in a bid to shore up fiscal discipline and price stability.

Meanwhile, in forex online trading, Turkey’s annual consumer prices swelled to 69.8% in April, and are forecast to top out at 75-76% in May before easing to 38% by the end of the year, as the central bank’s latest quarterly inflation report predicts.

During his first year in office, Simsek has presided over a staggering rate-hike cycle, with the central bank increasing its policy interest rate by 4,150 basis points.

In the latest measures, Simsek also announced that public institutions would not buy or rent new vehicles for a period of three years and would not build new buildings for three years.

‘We are aiming to restructure the solid foundations of our economy,’ Simsek said. ‘We will invest on the effective points, in the allotment which will grow. We aim to increase the speed of structural reforms and to implement many innovations in banking and public finance.’

For forex online traders, these were big news. Public sector spending is set to rise in health, education and transport, but here too there is room for saving — Simsek says that in public sector employment, energy and waste management, and communications, ‘we expect to make savings that will soon amount to billions’.

Procurement for state institutions will be reduced by 10%, investment budgets by 15%, and new public sector hiring will be limited to the number of retirees.

‘We will be supporting disinflation with these fiscal policy steps we have announced [today]. We are going to save money by increasing efficiency in our public sector,’ he said.

‘And we will be strengthening our fiscal discipline for maintaining sustainable price stability, and our ability to finance the costs of last August’s devastating earthquake and conduct our green and digital transformation.

One of the most important developments for online forex tradingis Turkey’s commitment to forex online forex trading, fiscal discipline and economic reform.

By curbing public spending and improving how the economy works, Turkey is trying to bring inflation to its forex online forex trading targets.