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Forex Trading Trends: US Dollar lower ahead of inflation data

Forex Trading proved difficult for US Dollar traders as the greenback softened on April 9.

Forex trading saw investors cautious ahead of US inflation data, which could spell good news for the US economy.

The yen hovered near multi-decade lows, keeping traders on alert for action from Japan to boost its currency.

Forex trading economists expect the headline consumer price index (CPI) to have risen 0.3 on a monthly basis.

In this article, we highlight top forex trading trends and share valuable insights for all traders.

Forex Trading: USD drops lower

On Tuesday, the greenback was flat, but hovering near recent highs, as the market nervously waited for US inflation data.

The yen traded not far from lows last seen in the 1980s, with traders in foreign exchange markets buzzing about what measures, if any, Japan might take to try to prop up the yen. The US. consumer price index (CPI) for March is expected to rise slightly, 0.3% (from 0.4% in February) and core CPI for March is forecast to climb by 0.3% as well.

And US monetary policy has now priced in about a 44% probability of a June rate cut, up from just a 12% chance seven weeks ago, according to the CME’s FedWatch tool. The fed funds futures market priced in barely two–-quarter-point cuts in 2024, reflecting less than three cuts total for the full year.

Forex trading: Mixed Economic news

A weak for the dollar was dictated by mixed economic news, such as slowing growth in the US service sector and better-than-expected job figures, say analysts.

It has traded little changed through Tuesday trading, as investors await the release of US inflation data at the end of the week. Observers also cite the US Federal Reserve chairman, Jerome Powell, for being too cautious to indicate a rate cut in the coming months.

Forex trading: Fed Reserve in Focus

The Federal Reserve continues to telegraph a tight monetary policy stance and, on top of ongoing geopolitical tensions, the price action of other currencies, especially the euro, which largely stands pat, and sterling, which now trades a little higher, all add to the mix.

The focus in currencies continues to be on central banks, with the Bank of Japan yet to decide whether to conduct further monetary stimulus and the European Central Bank meeting on Thursday, in advance of which rates are expected to stay steady but will be closely watched for any tweak to its language indicating a data-dependent regime.

In a somewhat subdued trading session in global equities, momentum retreated from an earlier gain as investors held their breath for a wave of key data events.

Forex trading: US Treasury Yields Drop

Earlier in New York, U.S. Treasury yields reversed from their highest in more than four months, with investors holding off in anticipation of key upcoming inflation numbers from the United States ahead of what will be a crucial meeting from the European Central Bank.

Oil prices lost ground for a second day running, with hopes of a Gaza ceasefire fading after Israel and the terrorist group Hamas failed to agree a deal in fresh talks held on Monday in Turkey.

The dollar declined as traders weighed forthcoming US inflation data even as the Japanese yen held stubbornly close to its lowest levels in decades, forcing traders to watch for any sign of Japanese interventionist policy.

As US stock markets themselves began a decline on April 5, the Dow Jones Industrial Average, the Standard and Poor’s 500 and the tech-heavy Nasdaq Composite all fell in the second electricity-free session in the US.

Over in Europe, MSCI’s global stock index was also down and the region-dominating STOXX 600 index took a hit as the eyes of the world are on the policy announcement of the European Central Bank.

Forex trading: US Interest Rate Cuts

The chances of an interest-rate cut by the US Federal Reserve in June diminished in the futures market in spite of strong economic growth and continued overshooting of inflation.

The yields of Treasuries of different maturities went down to match some in Europe, and investors waited for new readings of inflation to clarify the direction of rates.

The dollar index rose slightly in the currency markets, while the euro and the yen both nudged slightly against the buck. Japan’s finance minister repeated that his country stands ready to once again intervene in the foreign exchange market to curtail the yen’s precipitous falls.

On the commodities front, US crude and Brent oil prices both tumbled, while gold set another all-time high, spurred by central bank purchases and an uptick in geopolitical tensions.

With market news at your fingertips, you're better equipped to make smart, informed trading choices.
With forex trading news at your fingertips, you’re better equipped to make smart, informed trading choices.

Forex trading: UK Pound Drops

Sterling, meanwhile, stood close to its two-week low against the euro and was fractionally higher against the dollar as investors held back before awaiting more US economic data and their assessments of the prospects for the UK’s recovery.

This week will see the publication of the latest UK gross domestic product (GDP) figures on Friday – after figures yesterday showing the slowdown in the UK’s jobs market were revealed in data on starting salaries of permanent staff and the British Retail Consortium said that growth in food spending had been lifted last month by the early Easter.

Prior to the Q3 GDP announcement, market action involving sterling in the forex market will likely be driven by events across the pond, as market players switch their focus to Tuesday’s core durable-goods report, which will be followed by a US inflation report on Wednesday and a European Central Bank policy meeting on Thursday.

Sterling rose a slight 0.05% against the euro to 85.76 pence, after holding at the week’s high of 85.87 pence on Monday. Ebury’s head of market strategy, Matthew Ryan, believes that upcoming February data could strengthen perceptions of a pickup in the British economy.

Meanwhile, versus the dollar, the pound was up another 0.1% at $1.2668, as the dollar continued to slip back and forth on a slightly tense mood, ahead of Wednesday’s U.S. data release. Joe Tuckey, at Argentex, said sterling could benefit from the UK corporate world bringing back its foreign cash for dividends.

Forex trading analysts are following the market expectations for the policy pathways of BoE and Fed.

Currently, market expectations for the year that BoE cuts its interest rate in 2024 are almost identical with Fed year-end expectations of 67 basis points.

Also on the horizon is the UK general election that is widely expected later this year; polls now put Labour well ahead of the incumbent Conservatives, as they were in March 1997.

The Labour Party has signed up to remain within the fiscal limits of the outgoing Conservative government (including a goal of reducing debt as a percentage of economic output over a certain period of time, as set out by the UK’s fiscal umpire).

The easing of mortgage-granting rules by banks in the Eurozone last quarter was the first such loosening in more than two years.

But the concession was made by lenders that continue to contract credit.

The pressure of high borrowing costs and the lacklustre economy is pushing down demand for loans.

That’s the outcome of the ECB’s decision to raise interest rates to record levels to stem inflation. Credit growth across the 20 countries that share the euro has reached a standstill.

Notwithstanding a slight loosening in the tightness of mortgage lending broadly unchanged since the previous survey, after tightening considerably since mid-2008’, appetite for new debt among households and businesses was muted.

Forex trading: European Central Bank

This showed up in the results of the European Central Bank’s quarterly Bank Lending Survey.

Loan standards for household property purchases were a little easier than estimated three months earlier, while the impact of the euro area’s sovereign-debt crisis saw corporate credit remain a little tougher to access than expected.

However, banks reported a substantial fall in demand for corporate credit, from their expectations three months earlier – and a small drop in demand for housing loans.

In Portugal, and elsewhere, high interest rates, less firm investment, and lower consumer confidence were seen as dampening demand for loans, according to the ECB. For the next quarter, banks expected a moderate decrease in firms’ demand for corporate loans, and an increase in household loan demand.

Furthermore, the prospect of rate cuts by the ECB pushed interest rates down on new mortgages as well, which reduces the profitability prospects of banks.

The subtle changes in forex trading, and in banking behaviour more broadly, convey the complex interaction between shifts in monetary policy, credit demand and economic conditions in the Euro zone.

Forex trading: Russian Banks Expect profits

On Tuesday, at a banking conference, the Russian Central Bank’s Deputy Governor Olga Polyakova said that a net profit of Russian banks could exceed record 2023 estimates and exit this year with more than they might have made in 2023 after they recorded a surge in mortgage, consumer and corporate lending amid high inflation and the ruble’s steep fall.

Earlier in 2023, the bank had predicted a slump in profits to between 2.3 to 2.8 trillion roubles ($24.8- $30.2 billion) compared with net profits of 3.3 trillion roubles last year, amid the boom in lending.

Meanwhile, the head of Russia’s Central Bank warned that the high-risk component of mortgage loans is growing and could put pressure on credit losses on bank balance sheets, with an overall slowdown in the sector growth nonetheless expected.

The details suggest a subtle shift – representing a bullish revival – in the forex trading picture.

Today, you could be more profitable just by funding your domestic dollar operations, because it costs more funding your operations in China than it used to China is leading the city of banks.

This is the first time since June 2015 that we’ve seen more contracts traded between onshore and offshore centres. And it’s not just companies based in China that are increasingly funding their operations there with RMB debt. Multinationals are starting to follow suit.

For years, they preferred funding in US dollars or their home currencies, then converting to RMB for their Chinese subsidiaries, when the US had near-zero interest rates. But in the second half of last year, with the US Federal Reserve maintaining high-interest rates while China cut rates to help end an economic slowdown after COVID-19, it became more affordable to fund in RMB than in US dollars.

This interest rate differential now allows companies to save 150 to 250 basis points on interest costs by borrowing in RMB, in a move that has boosted interest in forex trading derivatives such as cross-currency swaps and RMB-denominated bonds. ‘Big clients with Rmb needs now like to borrow in Rmb,’ said Desiree Pires from Standard Chartered.

This trend reflects not only how global companies have shifted course in the wake of the pandemic’s unexpected economic shocks, but also the increasing acceptance of the Chinese currency on world markets. Traders of currencies who were once wary of deviating from stable, dollar-funded transactions seem to be increasingly comfortable using the RMB as a funding currency.

Get the latest in forex trading trends and insights
Get the latest in forex trading trends and insights

But that might be a short-term strength for the RMB as the possibility of Fed rate cuts later this year could suck its funding benefit away. The spread between yields on US and Chinese government bonds has widened, making cross-currency swaps attractive to firms looking to save on funding costs. For instance, as at 1 April, a one-year cross-currency swap between US dollars and offshore RMB was trading at a rate 2.28% lower than US rates, an opportunity to save up to 228 basis points over-borrowing in greenbacks.

What was not seen as a win-win for both sides ultimately did become a win, as offshore RMB cross-currency swaps started speeding up late last year, and the issuance of panda bonds by non-Chinese firms is poised to top $50 billion this year and could surpass the full-year record of $143 billion in 2023.

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