Online Forex Trading: Inflation Risks Could Shift Your Trading Strategy

Online forex trading revealed ample opportunity for traders and investors.

Global shares held close to one-month highs on Tuesday as traders saw better chances that the US Federal Reserve will deliver one, or even two, interest rate cuts this year, while a mixed bag of data kept equities from crossing into new territory.

The forex market was weighed down by a stronger euro versus the yen, while the dollar also struggled to hold onto its gains.

Online Forex Trading: Inflation risks

The disappointing US jobs report last week, combined with other data showing the slowest quarterly growth in almost two years, prompted a wholesale change of heart among traders.

According to online forex trading brokers: traders on forex trading sites are now pricing in 45 basis points of Fed rate cuts by the end of 2024, with a first cut perhaps in September, says LSEG’s rate probability app.

The yield on benchmark 10-year Treasury notes sank to a nearly one-month low of 4.431%, and the dollar index, an important gauge for online forex trading, slipped about 1.3% from a near six-month high on 1 May.

Thierry Wizman, global FX and interest rates strategist at Macquarie in New York, said that, given all the talk of ‘the end of US exceptionalism’, the emerging downtrend in the dollar would ‘not persist long in the absence of clear-cut justifications for other economies to outperform the US’.

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Even prospects for less restrictive monetary policy – including comments from Neel Kashkari, president of the Minneapolis Fed, noting ‘we’re running out of ammo’ to reverse what he characterised as stalling inflation progress – powered a risk-on appetite for stocks and other risky assets, with the MSCI’s global stock index, and major US stock indices, including the Dow Jones, S&P 500 and Nasdaq also up.

Meanwhile, in Europe, the STOXX 600 index climbed to a one-month peak, as UBS shares outperformed analysts’ expectations, a sign that posted heavily in online forex forums across the world might have implications for the wider market and currency stability on foreign exchange.

Lower treasury yields are clearly on their way after what seems like an eternity – especially considering this week the market is digesting a huge new supply of US Treasury notes.

Auctions this week for new three year, ten year and thirty year bonds will certainly have a big impact on the forex market.

Kevin Flanagan, head of fixed income strategy at WisdomTree in New York, pointed to the Fed chairman Jerome Powell’s ‘dovish’ signals about no more rate hikes, as well as the softer jobs data, which sent the Treasury market into a ‘selloff relief rally’, as closely tracked by online platforms for forex trading.

With the slight drag on the dollar from investors’ expectations of falling rates, forex traders were even more sensitive to the rise of the euro and the fall of the yen, trailing indicators that serve as valuable clues for benchmarking their own strategies in the dynamic online forex trading arena.

Expectations of huge interest-rate differentials kept the US dollar weak but strong against the Japanese yen on Tuesday with Tokyo officials again warning that they would intervene to stabilise the yen, which everyone watches on the online spread-betting community of forex trading.

Masato Kanda, Japan’s top currency diplomat, reiterated that Japan would take action to fend off ‘disorderly’ speculative-driven forex moves – the clearest sign yet that the Bank of Japan (BOJ) was ready to intervene again after suspected weekend interventions last week that might have cost the BOJ nearly $60 billion.

Joseph Trevisani of FX Street, an expert senior analyst, wrote online: ‘The BOJ’s big intervention last week calmed the yen waters but, with so little on which to needle the yen, the market is still quiet.

The dollar was up 0.29% against the yen this morning to 154.33, after plunging more than 3% last week, the sharpest weekly decline for the dollar vs yen since December 2022, and a move closely watched by online forex traders.’

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Minneapolis Federal Reserve President Neel Kashkari pointed to the red-hot housing market and evidence that the Fed may have once again failed to deliver inflation (bringing it from its low level back up to 2%) and that policy may not be as restrictive as Fed officials suppose.

His remarks follow comments from other Federal Reserve officials this week that suggested the next move could be a rate cut.

With a relatively quiet calendar on the economic side this week, forex traders will be keeping an eye on readings such as the University of Michigan consumer sentiment and the comments from Federal Reserve officials, including the governors Lisa Cook and Michelle Bowman.

‘But while there isn’t any clear trend, there is speculation in the markets that the Fed won’t come out with lower rates,’ says Trevisani. ‘Not necessarily because they are hawks, and maybe not even what most central bankers want, but because the speculation is that the Fed doesn’t want to.’

The dollar index was down 0.02% to 105.13, and the euro was up 0.06% to $1.0773 as the softness in the jobs report boosted the chance traders are seeing two rate cuts this year, with a 25-basis-point cut in September at 65.7%, according to the FedWatch Tool from the CME.

The Australian dollar slipped against the greenback as the Reserve Bank of Australia (RBA) left interest rates steady and did not sound hawkish as some analysts expected.

RBA Governor Michele Bullock said her inflation outlook was skewed toward the upside, though she did not provide further clarity on policy direction, which could leave markets guessing on whether easing might be on hold for now. The Aussie buck edged down 0.12% to $0.6616.

Meanwhile, sterling fell 0.1% to $1.2549 ahead of the Bank of England’s policy announcement on Thursday, when again rates are unlikely to be changed – but it’s still one to watch for those engaged in online forex trading.

Meanwhile, the British pound retreated against the U.S. dollar on Tuesday ahead of the Bank of England’s policy statement this Thursday, with markets now fully pricing in two quarter-point rate cuts this year.

According to a poll of economists by Reuters, the BoE will probably keep rates on hold this week, but leave the door open for a potential cut as early as June.

Market sentiment expects 53 basis points (0.53 percentage points) of easing this year, roughly two quarter-point cuts. Markets expect that news after March inflation data showed prices had been slowing less than expected.

Kirstine Kundby-Nielsen, FX analyst and chief economist at Danske Bank in Copenhagen, anticipates that ‘at least two of the MPC’s nine members will vote for a rate cut’. She also expects the pound to come under pressure against the euro as markets adjust.

At around midday on Monday, the pound was down 0.2% on the dollar, to $1.2534, and 0.1% on the euro, at 85.86 pence.

Still, this year the pound is one of the best-performing currencies, with just a 1.5% year-to-date decline to the particularly strong dollar, compared with the euro’s 2.5% drop and the yen’s 8.5% tumble.

But with inflation now appearing to be backing off towards the BoE’s target, policymakers, including the new governor Andrew Bailey, have expressed greater confidence on its outlook and markets have pencilled in more easing.

‘The pound does look probably a bit expensive, and I think it’s prone to weaken,’ said Paul Mackel, HSBC’s global head of FX research. This is ‘because it’s defied gravity for too long’, he said – another aphorism that will serve traders well in an online forex platform.

Meanwhile, UK construction companies recorded their most rapid expansion in more than a year in April, despite a fifth straight decline in house building. ‘Three years after the worst of the financial crisis, the economic recovery is now more persistent and broad-based, having been jobless and fragile for two years,’ said Peter Arnold, EY UK’s chief economist.

Meanwhile, economists polled by Reuters are calling for a 0.4% growth in the first quarter, after a 0.3% contraction in the final quarter of last year.

Official data is due on Friday and will be another of those real-time events to follow closely in online forex trading.

‘Disorderly or speculative movements in exchange markets can inflict serious damage on the Japanese economy,’ stated Masato Kanda, Japan’s top currency diplomat, reaffirming Tokyo’s pledge to intervene to quell volatility in the yen.

For participants in electronic forex trading this spells out crucial implications regarding Japan’s eagerness to support its currency given the recent flurry of volatility.

Against this backdrop, the Bank of Japan’s governor, Kazuo Ueda, spoke with the prime minister Fumio Kishida after the yen fell sharply. Japan could resort to intervention in the currency market without delay if needed, according to Kanda, the vice finance minister in charge of currency policy.

But he added: ‘If [exchange rates] move in line with economic fundamentals, intervention is not needed.’ What matters is whether the currency moves are ‘excessive’ or ‘out of line with economic fundamentals’, or, to put it another way, are they fuelled by speculative activity?

Ueda pointed to the down-to-earth, tactical stance of the central bank, watching how the yen affects inflation and influencing the timing of any interest rate changes. ‘Price moves can have an important knock-through effect on the economy, and the BOJ will carefully monitor the yen’s recent falls in policy deliberations,’ Ueda told reporters after his meeting with Kishida.

Although a weak yen is good for exporters, Japan Inc has been caught off balance by the resulting price hikes and inflationary threat. Tokyo’s intervention – which has been estimated to have cost upwards of $58 billion – helped the yen rebound from a 34-year low of $160.245 up to $151.86 just a week later.

In the world of online forex trading, such interventions by Japan (or any other country that has become a target for currency speculators) are seen as a tactical retreat to shore up a beleaguered currency.

Still, no one knows how low the yen’s slide can go, and what toll it will take on the economy.

This week, the Keidanren’s chairman Masakazu Tokura said that he considers a rate below 150 yen per dollar to be unstable for the economy.

BOJ made clear that it planned to end negative interest rates, but the yen remains under pressure – will the yen further weaken even more in the coming weeks as domestic yields are low and U.S. rates are higher?

These trends have been crucial in pushing investors from online forex trading into ever higher-yielding assets in their avowed bid to break free of the BOJ’s zero-yield clutches.

Ueda nodded towards the prospect of staged interest rate hikes, but any quick increases would risk derailing Japan’s already painfully fragile recovery.

What is increasingly unclear is how soon, and by how much, the BOJ will push the cost of borrowing back toward more normal levels from near-zero keep-the-market-alive levels.

While there are many schools of thought, it would appear that traders are keeping their cards close to their chest.

On Tuesday, Australia’s central bank governor said interest rates were at the right level after the Reserve Bank of Australia (RBA) kept rates on hold for the sixth month in a row.

She also said inflation risks were skewed to the upside while saying easing in the coming months wasn’t likely.

This news will be vital for any forexx traders considering online forex trading as the outlook will have a bearing on what strategy they will employ in currency markets.

At its two-day May policy meeting, the RBA didn’t even move toward a tightening bias. It held rates at a 12-year high of 4.35%.

That surprised many economists, who thought the bank would get more aggressive as inflation remains strong and the labour market is failing to cool as predicted.

Governor Michele Bullock frankly said that she hoped that higher rates wouldn’t be needed but that the board would act if inflation in the service sector remained high.

For online forex trading online, this dovish attitude affected markets that had factored a hike into rates following high inflation data.

The Australian dollar slid 0.5% to $0.6587 and bond futures firmed, while market bets for a September rate hike fell from 43% to 13%.

Bullock said that, while RBA board members ‘weighed up’ hiking interest rates, they decided that current monetary policy is already restrictive enough to bring inflation down to the RBA’s 2-3% target by late next year.

Although the RBA is one of the more dovish central banks (its economists see inflation rising to 3.8% and staying there until the end of the year, with no rate cuts until mid‑2025), the first quarter inflation rate slowed only slightly, and the labour market has also been gradually loosening, with the unemployment rate at 3.8%cent in March.

At the same time, inflationary pressures continue to hamper other central banks’ efforts to push rates back towards target levels, adding yet another roadblock in their journey to eventually start cutting rates.

The Federal Reserve is still expected to lower rates by less than two times in 2024, versus six times at the beginning of the year.