(Newswire.net — March 1, 2017) — Trillions of dollars are traded on the Forex markets every day. Forex trading is a global activity where prices are driven by macroeconomic and political events. Forex traders respond to daily events, buying and selling currency in response to numerous factors, including international trade, capital markets, economic news and political events.
Currencies are never traded alone. Rather, currencies are all linked, so they are traded in pairs. When a currency pair rises or falls in tandem, it is called a positive correlation. When they go in opposite directions, it is a negative correlation. Currencies will appear more than once, with the USD often appearing as the counter currency in Forex pairs.
Understanding the correlations between different currencies is essential if you want to be a successful Forex trader. GBP/USD is the most traded currency on sites like ETX Capital, but JPY/USD and EUR/USD are also popular pairs.
Politics are causing much of the volatility in the world’s financial markets right now. The ‘Trump Effect’ has sent the dollar soaring and given many currency pairs a boost. Brexit also caused a huge ripple through the financial markets, with the pound plunging overnight to levels not seen for 31 years. Fortunately, the markets soon rallied and the UK economy has since picked up again.
GBP/USD
The GBP-USD pairing is one of the most volatile. It’s favoured by professional Forex traders with short-term, more aggressive strategies. The GBP/USD pair accounts for 12% of the trading volume on Forex markets.
Prior to the 2008 global recession, the GBP/USD pair peaked at 2.09. Today it’s trading around 1.22. Following a huge slump after the UK referendum voted for Brexit, the pair stabilized at around 1.3. Despite dire economic predictions from the Bank of England and the ‘Remainers’, the UK economy has grown, which in turn has boosted the value of the pound.
The outlook for the GBP/USD pair is dependent on future Brexit negotiations and whether the Federal Reserve decides to raise interest rates over the next few months. Currently, Janet Yellen is remaining tight lipped on whether interest rate rises are forthcoming, but with consumer spending dangerously high and inflation rising, the Federal Reserve won’t want to risk a debt bubble forming.
Theresa May is set to trigger Article 50, which will herald the UK’s departure from the European Union. At the moment, it isn’t clear whether the UK will retain access to the Single Market, so there is likely to be a few strong headwinds ahead for Sterling. The UK economy is thriving at the moment, with the pound having rallied in the months following the UK referendum vote, but further unpredictability and rising inflation could dampen down Sterling’s recovery. As a result, a strong dollar could weigh heavily on GBP/USD.
Since early February, the GBP/USD pair has struggled to break the falling trend line. The GBP/USD trend is one of sharp rises and falls, with very little discernible pattern. Going long is risky.
EUR/USD
The EUR/USD is normally one of the most predictable Forex pairs. Trading in EUR/USD gives you access to options, CFDs and futures. This pair is one of the most popular, but it has faced a great deal of volatility since its inception in 1999. The real estate bubble and the European debt crisis badly knocked the USD and EUR, and in the latter, there is still no resolution in sight with Greece facing a possible Grexit.
The Euro is languishing in a major slump right now. Marine Le Pen is bidding to become the next French leader and support for the Euro is fading fast. If Le Pen wins the election, there are fears she may veto the Euro in favour of a return to a national currency. Most analysts predict the Euro will continue to fall as the US dollar enjoys an economic boost following President Trump’s inauguration.
Inflation is creeping up in the US, but although the Federal Reserve raised the Fed funds by 0.25% in December 2016, Janet Yellen is stalling on any further rate increases. However, the Fed is keen to avoid any liquidity problems. Since the dollar historically rallies when interest rates go up, we can expect to see a widening gap between the Euro and USD over the next few months.
Right now, the EUR/USD trend line is falling and upward momentum is sorely lacking. Some residual weakness on the USD lifted the EUR/USD, but this may not last.
USD/JPY
USD/JPY is extremely volatile therefore it is not recommended for beginners in Forex trading. However, it does offer a wide variation in price, so if you are more experienced, it’s a good choice.
The Japanese Yen is one of the most heavily traded currencies in the Forex markets. It’s seen as a ‘safe harbour’ during times of financial volatility. The Japanese economy has been grappling with deflation in recent times. In a bid to counter this, the Bank of Japan increased their purchase of Yen. Exports are now cheaper, but imports are more expensive. Unfortunately, President Trump’s election has given the financial markets a major boost, strengthening the Yen just as the Chinese economy faltered.
The Bank of Japan adopted a controversial move of enacting negative interest rates in a bid to weaken the Yen. It worked for a short time, but within six months the Yen rallied and was stronger than ever. The JPY/USD pair lost 20% and investors panicked. In the weeks following the US presidential election, the Yen dropped lower as the dollar soared. This pushed the JPY/USD up by more than 17%. The Nikkei Index also enjoyed a substantial boost, gaining 22% in three months.
It’s now unlikely that the Bank of Japan will adopt any further monetary stimulus tactics, as the economy is improving. Inflation is rising, but the Yen remains bullish. Some weakness in the USD have caused losses in the USD/JPY, but there has been very little momentum in either direction in the last week.
Pairs Trading
The EUR/USD is the best pair for beginners, as the USD and Euro are the two largest currencies and therefore low risk.