The Forex Guide to Fundamentals

Gold prices are rebounding, as the US Dollar declines on NFP data. Expectations for today’s NFP (Non-Farm Payrolls) event were set at 200k, and released better than expected at 235k. Also, January’s high was revised upwards from 227k to 238k.

Technically, gold prices have found support after declining to a 76.4% Fibonacci retracement level found near $1,200.00. This line has been calculated by measuring the distance between the January 27th low to the February 24th high. If gold prices remain support here a bullish close would stem a seven day losing streak for the commodity. In a continued bullish scenario, traders should next look for the commodity to test the 10 day EMA (exponential moving average) at $1,220.53.

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Investing.com Economic Calendar indicator is on this thread.

NewsTrader EA based on the Investing.com calendar instead of the DailyFX calendar is on this thread.

In this webinar, we discussed how to use multiple time-frames and take a top-down approach when analyzing markets. This not only helps put the prevailing winds at your back, but can also guide you towards better entries, thus improving the average risk profile of a trade (as we always discuss, risk management is paramount to trading success). We examined a few key tenets to start, then delved into a few past and current examples for a comprehensive overview.



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US Dollar Forecast: US Dollar Sheds Windfall Gains, May Resume Core Uptrend
The US Dollar shed windfall gains scored on the back of haven demand amid turmoil in emerging market assets.

British Pound Forecast: The British Pound Finally Finds Relief; But Can it Last?
The British Pound finally found a bit of strength this week, but sellers quickly began to show on Thursday and Friday; bringing question to near-term direction in GBP. Can long-term support continue to bring bulls into the mix?

Japanese Yen Forecast: USD/JPY Rate Recovery Susceptible to Lackluster U.S. GDP Report
USD/JPY appears to be on track to test the monthly-high (112.15) as the exchange rate initiates a bullish sequence off of the August lo (109.77).

Australian Dollar Forecast: Australian Dollar Still Short of Reasons to Buy Despite New PM
The Australian Dollar may be rid of the uncertainty at the top of domestic politics, but the bulls still have plenty of work to do.

New Zealand Dollar Forecast: NZDUSD May Fall on Fed Policy Bets EU Revives Trade War Fears
New Zealand Dollar may fall as Fed rate hike bets rise, boosting USD. It may also be left vulnerable if stocks decline as the EU reignites trade war threats post Trump’s sanctions on Iran.

Equity Forecast: S&P 500, DAX, FTSE, Outlook Mixed for Week Ahead
Next week brings a few important nuggets of data and headlines to watch; U.S. stocks look to attempt a new record while the DAX tries to hold on and the FTSE remains generally difficult.

Oil Forecast: Saudi Shelves IPO with Oil above 75 Dallas Fed Sees Upside Shock Risk
A big week in crude saw a massive drawdown in US oil stocks signaling high demand, while high prices may have lessened the need for a Saudi Aramco IPO.

Gold Forecast: Gold Prices Snap Six Week Losing Streak as US Dollar Slides
Gold prices are up nearly 2% after rebounding off key support- is a low in place? These are the targets & invalidation levels that matter heading into next week.

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What are forex quotes?

A forex quote is the price of one currency in terms of another currency. These quotes always involve currency pairs because you are buying one currency by selling another. For example, the price of one Euro may cost $1.1404 when viewing the EUR/USD currency pair. Brokers will typically quote two prices for any currency pair and receive the difference (spread) between the two prices, under normal market conditions.

Example of EUR/USD forex quote


Understanding Forex Quote Basics

In order to read currency pairs correctly, traders should be aware of the following fundamentals of a forex quote:
ISO code: The International Organization for Standardization (ISO) develop and publish international standards and have applied this to global currencies. This means each country's currency is abbreviated to three letters. For example, the Euro is shortened to EUR and the US dollar to USD.

Base currency and variable currency: Forex quotes show two currencies, the base currency, which appears first and the quote or variable currency, which appears last. The price of the first currency is always reflected in units of the second currency. Sticking with the earlier EUR/USD example, it is clear to see that one Euro will cost one dollar, 14 cents and 04 pips. This is unusual as you cannot physically hold fractions of one cent but this is a common feature of the foreign exchange market.


Bid and ask price

When trading forex, a currency pair will always quote two different prices as shown below:


The bid(SELL) price is the price that traders can sell currency at, and the ask(BUY) price is the price that traders can buy currency at. Traders will always be looking to buy forex when the price is low and sell when the price rises; or sell forex in anticipation that the currency will depreciate and buy it back at a lower price in the future.

Spreads

The price to buy a currency will typically be more than the price to sell the currency. This difference is called the spread and is where the broker earns money for executing the trade. Spreads tend to be tighter (less) for major currency pairs due to their high trading volume and liquidity. The EUR/USD is the most widely traded currency pair, so it is no surprise that the spread in this example is 0.6 pips.



Direct vs Indirect Quotes

Quotes are often displayed in accordance with the “home currency” in mind i.e. the country you reside in. A direct quote for traders in the US, looking to buy Euros, will read EUR/USD and will be relevant to US citizens as the quote is in USD. This direct quote will provide US citizens with the price of one Euro, in terms of their home currency which is 1.1404.

The indirect quote is essentially the inverse of the direct currency (1/direct quote = 0.8769). It shows the value of one unit of domestic currency in terms of foreign currency. Indirect quotes can be useful to convert foreign currency purchases abroad into domestic currency.

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Using PPI to trade forex: Talking points

• PPI stands for the Producer Price Index, which is an important piece of economic data
• PPI data is released during the second week of each month.
• Forex traders can use PPI as a leading indicator to forecast consumer inflation measured by the Consumer Price Index (CPI).

PPI is an important piece of economic data due to its signaling effect on future expected inflation. Traders monitor PPI in forex trading because of the positive relationship between inflation and interest rates, but ultimately, traders are concerned with how the resultant interest rate changes are likely to affect currency pairs. Continue reading to learn more about the PPI index and how it affects the foreign exchange market.

What is PPI and what does it measure?

PPI stands for Producer Price Index and measures the change in the price of finished goods and services sold by producers. PPI data represents the monthly change in the average price of a basket of goods purchased by manufacturers.

How is PPI calculated?

PPI examines three production areas; commodity-based, industrial-based, and stage-of-processing-based companies. Released by the Bureau of Labor Statistics, PPI is created using data collected from a mailed survey of retailers selected via a process of systematic sampling of all firms listed with the Unemployment Insurance System.
Traders can see changes in PPI expressed as a percentage change from the previous year, or on a month to month basis.

PPI and inflation

A positive change in the PPI index implies that costs are rising and, in the end, price increases get passed down to consumers. If this effect is large enough, there will be an increase in future CPI figures to reflect that the general level of prices has increased.

Inflation and the effect on the economy

An increase in the general price level is good for an economy but only when this is contained. When demand for goods and services increases, businesses must increase capital expenditure and hire more workers in order to increase their output to meet higher demand. The problem arises when prices increase drastically, resulting in a decrease in the purchasing power of a country’s currency. $1 can buy less than it could one year ago, for example.

In the 1950s, gasoline was $0.27, while apartment rent was $42/month and a movie ticket was $0.48. These figures are nowhere near to where they are today, and this reflects how inflation erodes the value of local currency. In an attempt to combat the erosion of purchasing power, central banks effectively reduce inflation by raising the benchmark interest rate.

How does PPI impact currencies?

When it comes to money there is always a trade-off: individuals can save money and earn interest, or they can spend money immediately and forgo any interest payments.
If PPI is on the rise it may cause the interest rates to rise. When interest rates go up, electing to save money looks more attractive as the reward (interest) is greater than before. Spending money becomes costlier because consumers would effectively be losing out on the higher interest rate when they choose to spend money instead of saving. As a result, increased PPI may filter down into increased rates and a stronger currency.

How PPI affects the US dollar

The Producer Price Index tends to have little effect on the US dollar initially. This is because in the real economy there is a time lag between the increase in prices from producers, and the end result of higher inflation resulting from consumers having to fork out more at the tills.

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The Bank of England (BOE) is the UK’s central bank. Their mission is to promote and maintain monetary and financial stability. It is important for forex traders to keep up to date with the Bank of England’s latest changes to monetary policy because it can have a large effect on the Sterling Pound (GBP) and relevant currency pairs, like the EUR which is highly correlated to the Pound.

WHAT IS THE BANK OF ENGLAND (BOE)?

Established in 1694, the Bank of England is the banker to, and owned by, the British government but is independent when setting monetary policy. Its roles include the setting of monetary policy - which includes targeting interest rates and using other tools to stimulate or contract the economy - producing the UK’s bank notes, supervising some bank payment systems, and ensuring the stability and safety of the financial system.

For traders, the BOE’s setting of monetary policy is a key factor to consider as it can have a big impact on the financial markets. Other factors, like the independence of the central bank are also important but are more prevalent issues in emerging market economies.

KEY ECONOMIC MANDATES OF THE BANK OF ENGLAND

According to the Bank of England, their two core purposes or mandates are:
1) Monetary stability - which is price stability or inflation
2) Financial stability - which is the stability and health of the economy

February 2014 Bank of England Inflation Report:

HOW BOE INTEREST RATES AFFECT THE POUND

Interest rate impact on the Pound

This is the general principle for how interest rates affect the Pound and stock market, although they sometimes react differently:

• Higher interest rate expectations increase the strength of the Pound (GBP) and negatively affect equity values.
• Lower interest rate expectations decrease the strength of the Pound (GBP) and positively affect equity values.

Interest rate impact on the economy

The Bank of England lowers interest rates when it is trying to stimulate the economy (GDP) and increases interest rates when it is trying to contain inflation caused by an economy operating above potential (overheating).

Lower interest rates stimulate an economy in a few ways:

• Businesses can borrow money and invest in projects that will receive more than the risk borrowing rate.
• When interest rates are lower the stock market is discounted at a lower rate, leading to an appreciation in stock market values which causes a wealth effect.
• People invest their money into the economy (stocks and other assets) because they can earn more in these assets than at currently low interest rates.

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The European Central Bank (ECB) is situated in Frankfurt, Germany. It was established in 1998 by the Treaty of Amsterdam. The European Central Bank is different to other central banks in that it controls monetary policy for the entire eurozone. Countries that belong to the eurozone include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia and Spain.



What is the ECB

The European Central Bank acts as the central bank for the 19 countries that belong to the eurozone. The European Central Bank is overseen by a governing council that consists of six executive board members, with one serving as the president. The executive board members are appointed by the European Council.

The European Central Bank’s primary objective is to maintain price stability. They use monetary policy to support the economy and job creation.

Key Economic Mandates of the ECB

The European Central Bank’s primary mandate or objective is price stability. Price stability is the control of inflation, Harmonised Index of Consumer Prices (HICP) and the exchange rate of the EUR.
1) Price Stability - which is price stability or inflation
2) Financial stability – Through the control of price stability and sometimes other mechanisms.
Price Stability
To maintain price stability, the European Central Bank influences the short-term interest rate for the eurozone. The European Central Bank has a target interest rate (like most central banks) of below, or close to, 2%. Although they target inflation mostly, GDP and unemployment data have a big effect on the decisions the policy makers make.

If inflation goes above 2%, the European Central Bank may signal a hiking of the interest rate to the public to tighten the eurozone’s economic expansion and bring down inflation. If unemployment numbers are increasing and the economy is slowing down, the bank may have to make the decision to decrease interest rates, to stimulate the economy and job growth. A period of rising inflation and increasing unemployment will require the policy makers to weigh the pros and cons of tightening the economy to reign-in inflation or stimulate the economy to produce jobs.

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Panic selling from the coronavirus has not only caused global equities to plunge but also darkened what was an already-gloomy outlook for the Eurozone. The region was beginning to show signs of stabilization, but the spread of the coronavirus has cut that recovery short and resurrected fears of another downturn in Europe. This comes after the region suffered from a politically-turbulent two years both internally and externally.

Since topping in mid-February, the German DAX equity index has plunged over 20 percent and is a hair away from the 2018-low at 10381.510 after it recorded its biggest one-day decline on record.

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The first quarter of 2021 looks set to be an intriguing, and volatile, three months for sterling-denominated assets and traders

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