Forex trading is proving highly lucrative in the second quarter of 2024.
All eyes are on the US Dollar’s strength and the upcoming rate cuts from the US Federal Reserve.
Poor job data is tanking the British Pound, and high inflation is negatively affecting the Japanese Yen.
Stay tuned for forex trading advice and insights.
Forex Trading – US Dollar Pauses
On Monday, the dollar paused in forex trading even as traders kept an eye on upcoming US inflation data. The yen edged up to a 34-year low on the foreign currency markets, with speculators looking for Tokyo to intervene and lend some support to the sagging yen.
Trading last week in foreign exchange rates was something of a roller-coaster ride, with two releases on the US economy giving different signals about the outlook for interest rates.
In the end, the strong employment figures overwhelmed any fears ‘Faster, higher inflation’ generated by a slower-than-expected rise in services growth, and the markets reassessed the probability of the Federal Reserve cutting rates this year.
Forex trading: US Dollar Index
The dollar index, measured on a weighted basis against six major currencies, was little changed at 104.35, while markets have seen more movement in their expectation of interest rate moves in the future, conveniently measured in US Treasury yields.
Central bank policy decisions are always a major gauge of currencies for forex trading. US consumer price inflation data for March is due on Thursday, followed by the European Central Bank (ECB) policy meeting, both of which should be crucial for the dollar and the forex market.
The dollar gained 0.17% against the yen to trade at 151.895, flirting with the highest levels since July 1990. Notably, Japan’s new prime minister Fumio Kishida last week warned that Tokyo would take ‘decisive steps’ if the yen shows excessive declines.
Unlike the announcements by the US’s Jerome Powell and Sweden’s Riksbank governor, the Bank of Japan’s new Governor Kazuo Ueda gave few hints as to how monetary policy will develop.
Still, at a parliamentary session, the governor chose ‘resilient’ to characterise Japan’s economy, a notch higher than the periphery of ‘weak’.
The comments came as a one-time former high-ranking Japanese currency official argued a so-called ‘five-arrow’ intervention, under which Tokyo curbs sharp currency declines by selling yen against foreign currencies, may be imminent.
Forex trading: June Rate Cut
Intervention fears might have a capping effect on dollar-yen volatility. Spot rates also saw small declines for the euro and sterling against the dollar.
The ECB is scheduled to keep interest rates steady, but a strong hint for a rate cut for June would come as little surprise as markets increasingly act on the assumption that a reduced VAT tax rate will descend into more ECB easing, even amid growing confidence that inflation is finally moving towards the ECB’s target rate.
Over in cryptocurrency, bitcoin was up another 4% to trade around $72,280—something inevitably brought up in almost every forex conversation.
Forex Trading: Market Snapshot
In early trading on Monday, stocks around the globe held steady overnight after retreating last week, as the price of oil pulled back slightly from six-month highs and yields on US bonds surged to the highest since late November as investors priced in fewer expected cuts to US interest rates.
The European STOXX 600 rose a modest 0.24% in early trading on Monday, also recovering from a 1.2% drop last week after Germany’s DAX helped ease a glum mood by gaining 0.54% on promising industrial output data.
Futures for the US S&P 500 similarly held steady after taking a 0.95% pounding last week, while futures for the tech-focused Nasdaq remained flat.
Forex trading: Middle East Tension
As the second quarter kicks off, stock markets have had a bumpy start as signs of geopolitical tension in the Middle East pushed oil prices higher, and robust economic indicators from the US triggered fears about how much further central banks might be able to cut borrowing costs.
Oil prices fell back again on Monday as geopolitical tensions seemed to subside as Israel pulled back troops from southwestern Gaza and truce talks continued, albeit with Egypt reporting slower progress than Hamas itself.
Brent crude fell 0.9% to $90.33 a barrel after touching a six-month high of $91.91 on Monday, as some in the market feared that Israel had attacked Iran’s embassy in neighbouring Syria.
Even so, the high, tight supply situation means prices aren’t coming down much, at least in the short term.
Still, investors’ recent predictions for a June Federal Reserve rate cut have been ratcheted back after an unexpectedly good U.S. employment report on Friday, and upbeat manufacturing numbers earlier in the week.
Forex Trading: British Pound Drops Against USD
The British pound also retreated against the dollar on Monday after some disappointing wages figures from recruitment agencies suggested a slowdown in the UK labour market. Sterling lost 0.1% against the US currency, trading at $1.2626, while it was little changed against the single currency, at 85.77 pence per euro.
Starting salaries for permanent staff, according to recruitment firms, grew at their weakest pace in more than three years in March, while the REC reported that spending on temporary staff recorded its biggest contraction since July 2020. Such data could encourage Bank of England policymakers to believe that wage-led inflation in the economy is easing towards their target of 2%.
However, the Bank of England has been somewhat reluctant to use REC data in recent analysis.
Meanwhile, futures markets currently give a 25% chance to the Bank of England cutting rates at its next meeting on 9 May.
Forex trading: Eurozone
April saw confidence among investors in the eurozone rise for the sixth straight month, to its highest level since more than two years ago, according to a survey released on Monday. Even if Germany remains a drag, it is showing ‘economic signs of life’.
In April, the Sentix sentiment index for the eurozone hit -5.9, up from -10.5 in March and the highest since February 2022, beating the -8.5 forecast of aggregate analysts.
‘A major economic recovery might be ahead,’ Sentix said, adding: ‘With every passing week, the recovery of the eurozone’s economy is gaining in momentum, and a recovery of the world economy is in sight. The current month’s international economic indicators are also pointing to stabilisation.’
While Germany’s expectations values rose to their highest since February 2022, Sentix pointed out that ‘Germany, the biggest economy in Europe, is still lagging behind other major industrial nations.’
The expectations index for the eurozone rose to 5.0 in April from -2.3 in March, marking the seventh monthly increase in a row — and the highest figure since February 2022.
Meanwhile, the current situation index for the eurozone rose to -16.3 in April from -18.5 in March, the sixth consecutive monthly improvement.
Forex trading: Indian Rupee loses out
Meanwhile, the Indian rupee lost out on Monday after recovering last week. It ended the day weaker on higher dollar demand from government-owned banks, markets said, on behalf of their import customers, that offset the southbound movement of the local currency, which opened the day higher.
The latest data showed the rupee closing trade at 83.3150 against the dollar, moving a fraction lower from its previous close at 83.2950 on Friday. The US dollar index was marginally up to 103.4 while most currencies across the region were down.
Forex trading: US Treasury Yields
Yields on US Treasuries jumped again on Monday, after a 0.2% rise on Friday, amid expectations for a slower-than-anticipated pace of rate cuts by the Federal Reserve after US jobs data for March showed stronger-than-expected payroll increases and a drop in unemployment.
The yield on the 10-year bond touched 4.45%, the highest since late November, and the 2-year yield rose to 4.78%.
The chance of the Federal Reserve keeping rates where they are at the meeting in June stands at around 52% today, up from 42% a week earlier, according to CME FedWatch.
The rupee breached the 83 level to hit an intraday high of 83.23 a dollar, but the dollar-buying by state-run banks kept gains in check, said a treasury trader at a private bank. the 1-year implied yield on dollar-rupee transactions fell by 2 basis points to 1.65% under pressure from spiking US yields.
Forex trading: Japan Inflation
Takehiko Nakao, a high-ranking former currency official in Japan, who was vice finance minister for international affairs from 2011 to 2013, said on Monday that Japan could intervene in the foreign exchange market to stop the yen’s steep falls if such movements were judged extreme, as the target has been hit by the dollar that was last month below an average of 100 to the yen.
Nakao pointed to the yen’s sharp decline against the dollar, which he said both the IMF’s real effective currency rates and the Big Mac index – which tracks the purchasing power parity of currencies across the globe using the price of the McDonald’s hamburger – depict as a dramatic weakening. ‘The positive effect on real estate and stock prices is weak, so [a weaker yen] would negatively affect household income and consumption.’
And while Nakao said that the roughly 30% depreciation of the yen against the dollar since 2022 was ‘not desirable’, he also noted that the yen was around 151.70, only a few steps from its 34-year low of 151.97 marked in March.
Forex trading: Excessive moves in Currency
Japanese officials have warned against speculative yen-selling, insisting that they would take any actions needed to quell ‘excessive moves’ in the currency. At the time, Nakao, in his role as de facto yen czar, oversaw dollars sales to keep the yen from climbing to a then-record high of just over 75 yen.
Nakao argues that international acceptance of Japan’s intervention would likely be greater for efforts geared toward pumping up the yen rather than driving it downward through efforts to improve export competitiveness. With the yen level and speculative trends the way they are, Nakao said that ‘it would not be surprising to see it happen next week.
