Fundamentally speaking, Japan’s inflation has not declined, which increases the probability of the Bank of Japan’s future tightening policy. After a long-term depreciation, the yen has space for a short-term rebound. AUD/JPY has less room for arbitrage than USD/JPY. With strong USD, please watch out for AUD/JPY bear.
Technically speaking, the AUD/JPY daily stochastic oscillator shows a dead cross, falling below the 50 median line.
(Golden daily cycle, Ultima Markets MT4)
The exchange rate began to decline after falling below the 65- day moving average. It is worth noting that before the short-term moving average crosses again, the market has a high probability of touching the 240 -day moving average and rising again.
(AUD/JPY in 1 -hour period, Ultima Markets MT4)
In 1-hour period, the bearish trend is obvious, and the exchange has fallen below the 2400 -period moving average. However, there is a certain probability that it will find support and rebound there. You may wait for short entry here.
(AUD/JPY in 1 -hour period, Ultima Markets MT4)
According to the pivot indicator in Ultima Markets MT4, the central price is 93.489,
Bullish above 93.489, the first target is 93.759, and the second target 94.272.
Bearish below 93.489, the first target is 92.987, and the second target is 92.706.
Disclaimer Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
Let’s turn the clock back to the end of last year. At that time, most investors and economists predicted that the US economy would inevitably suffer a recession in 2023 because of the environment of high interest rates.
But today, at the end of July, the Federal Reserve once again raised the federal funds rate by 25 basis points, lifting the target range of the rate to 5.25% to 5.5%, the highest level since 2001.
However, the US economy shows no sign of recession. As of writing, the US NASDAQ, S&P 500 and Dow Jones index went up 39.45%, 16.86% and 6.16% respectively so far this year.
So, will there still be a recession? If there is still the possibility of a recession, when will it happen?
The three major indexes of U. S. stocks are still rising so far this year.
Current situation: the market is still strong
Judging from the current market situation, the US Commerce Department announced on July 27th that GDP in the second quarter of this year grew 2.4% from a year earlier, up from 2% in the first quarter.
At the same time, the Ministry of Commerce said that compared with the first quarter of this year, the higher GDP growth rate in the second quarter reflected a rebound in private sector inventory investment and an increase in non-residential fixed investment. This seems to suggest that the US economy will not experience a hard landing any time soon.
Coincidentally, the US labor market has also shown resilience. The labor department announced on August 4th that the unemployment rate fell to 3.5% in July, down 0.1% from June and nearing a half-century low, while wages rose slightly, with the average hourly wage rising 0.4% in July from a year earlier. The current low unemployment rate also reflects a robust US economy.
Let’s take another look at the inflation data that the Fed is most concerned about. The US Bureau of Labor Statistics reported that the consumer price index (CPI) rose 3.2% in July from a year earlier, up slightly from 3% in June, reflecting rising food prices and still high housing costs.
But beyond that, the rest of the inflation-related data was mostly good news, especially the core CPI data, which excludes food and energy items, slowed further from a year earlier, from 4.8% in June to 4.7% in July. Although inflation has not been suppressed yet, the overall situation has improved significantly than before.
In short, there is a lot of data showing that market vitality is still strong, and it seems that the risk of recession is getting farther and farther away.
Looking back on history: the Truth behind high interest rates
Although the US economy is not showing obvious signs of recession at the moment, is this enough to indicate that recession fears are not enough to worry about? As the saying goes, there is nothing new under the sun. If we look back on history, it is not difficult to find that this may not be the time to rest easy.
In February 2008, it was only months before the collapse of 158-year-old Lehman Brothers. But Ben Bernanke, then chairman of the Federal Reserve, said that while the economic situation was not optimistic, he did not think the US economy would be at risk of recession. And at that time, there were not a few economists who supported this view.
When it comes to the financial crash that swept the global economy in 2008, this crisis actually did not appear at the peak of the high interest rate environment. Contrary to most people’s stereotype, the “Lehman moment” came after the Fed had cut interest rates sharply in a row.
In order to cool the apparently overheated housing market at that time, the Federal Reserve raised the federal funds rate to a high of 5.25% on June 29, 2006, and maintained it for more than a year.
It was not until September 18, 2007, that interest rates were cut by 50 basis points. By the time Lehman collapsed in September 2008, the federal funds rate had already fallen to 2%, entering a low-interest environment.
So, here comes the question, why is the recession still breaking out when interest rates have fallen and the pressure for high interest rates is gone? To answer this question, we need to quote an economic concept here: real interest rate.
The so-called real interest rate refers to the real interest rate level shown by the nominal interest rate after excluding the impact of inflation. If it is expressed in a mathematical formula, it is:
Real interest rate = Nominal interest rate – Inflation rate
Understanding the concept of real interest rates will be of great significance for us to analyze the truth behind high interest rates in the United States! Because corporate borrowing is a normal phenomenon in economic activity. Since borrowing is involved, interest rates are naturally an unavoidable topic. Only at favorable interest rates can the economy get a corresponding boost.
Let’s give a few simple examples here. It is a well-known fact that the inflation rate in the United States remained high last year. Let’s assume that at some point last year, inflation rate was as high as 8%, while the nominal interest rate in the United States was 4%. The high interest rate level of 4% seems to put a lot of pressure on corporate borrowing. However, once we introduce the concept of real interest rate, we will find that the interest rate level of 4% interest rate will not cause any pressure.
Because 4% (nominal interest rate) minus 8% (inflation rate), you get a real interest rate of -4%. At this time, the real interest rate is simply negative. In other words, although enterprises bear the cost of interest rates of 4%, due to the existence of 8% inflation, the prices of products or services produced by enterprises will naturally be pushed up by 8% by inflation.
As a result, enterprises can still make a profit of 4% just from borrowing. Therefore, as long as the real interest rate is negative, simply high nominal interest rates will not necessarily have a recession impact on the economy, because the cost of debt is negative. This is the reason why U. S. stocks still rise all the way in a high interest rate environment.
But let’s give another example. What if nominal interest rates go up all the way and inflation rate starts to fall? For example, suppose the nominal interest rate rises to 5%, while inflation falls to 3%. In this case, the real interest rate becomes +2%, and the previously negative cost of debt has been completely turned into a positive number. And this is what is happening to the US economy right now.
So, what kind of pressure will happen to the economy once real interest rates are negative? With regard to this question, we only need to look back at the past history and the answer is clear at a glance.
The trend of US inflation and the federal funds rate over the past 25 years.
The blue line: the US inflation rate; the black line: the federal funds rate (or the nominal interest rate).
By looking at the chart above, we can clearly see that in the past 25 years, there are two time periods when the nominal interest rate is higher than the inflation rate, or namely the real interest rate is positive. These two time periods correspond to the two red circles in the above chart.
These two periods roughly correspond to the dotcom crisis in the United States in 2000-01 and the global financial crisis in 2007-08. Thus, when the cost of debt is negative, economic activities tend to develop smoothly, and once the cost of debt is positive, crises often follow.
Outlook: the hidden danger of recession has not been eliminated
Bloomberg conducted a poll among economists last December when 70% of economists thought the US economy would suffer a recession within the next 12 months. But by July this year, that number had fallen to 58%.
Similar surveys are common in many mainstream financial institutions. Goldman Sachs, which thought there was no recession in the US economy as early as last year, further lowered the probability of a recession in the next 12 months to just 20% in July.
It seems that the risk of recession has once again been forgotten by economists. But through the above analysis of real interest rates and a review of history, we can see that the hidden dangers of the current recession have not been completely eliminated.
The trend of US inflation and the federal funds rate over the past year.
The blue line: the US inflation rate; the black line: the US federal funds rate (or the nominal interest rate).
The chart above reflects the trend of US inflation and the federal funds rate over the past year. The red circle in the picture reflects that real interest rates have reached a turning point from negative to positive at the end of last year and the beginning of this year.
Of course, the real interest rate can only be regarded as a temporary transition from negative to positive. But it is not clear whether this situation will last for a long time in the future. If the Fed adjusts its interest rate policy in time, or if inflation rises repeatedly, real interest rates are still likely to return to negative territory. In short, real interest rates already pose a potential danger to the possible risk of recession.
Just as real interest rates in the US showed signs of turning from negative to positive, in August, Fitch Ratings, one of the world’s three largest rating agencies, suddenly downgraded the US credit rating, downgrading its long-term rating from “AAA” to “AA+”. For the downgrade, Fitch said it was mainly due to several key drivers:
1.The level of governance in the United States has deteriorated:
Federal debt has remained high for years, and repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. All these show that the level of governance in the United States has deteriorated, and public confidence in the government’s financial management has also been undermined.
2.Rising government deficits:
Fitch expected the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Additionally, state and local governments were expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022.
Fitch also forecasted a government deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025.
3.General government debt to climb:
Fitch predicted that US general government debt as a share of GDP will continue to climb, reaching 118.4% in 2025. That is more than 2.5 times higher than the median of 39.3% for “AAA” and 44.7% for “AA” sovereign countries. Fitch’s long-term forecasts show that the debt-to-GDP ratio will rise further, which will increase the vulnerability of US finances to future economic shocks.
Summary
It is worth mentioning that the fattest brown bears usually exist in the autumn before hibernation, and when winter goes to spring, brown bears are instead the weakest.
It is as if before the recession, countries often had plenty of tools in their fiscal toolboxes, which needed to be consumed in order to deal with risks. If there is a day when there are few fiscal instruments left, leaving the Fed with no choice but to slash interest rates, a recession will then be inevitable.
Therefore, in the future, the market should no longer pay more attention to whether the Fed will continue to raise interest rates, but instead focus on what attitude or way the Fed will use to create the expectation of interest rate cuts in the future. This will deserve further attention from the market in the future.
If you have read our article “Basic Types of Charts in Technical Analysis”, now it’s time to unlock the secret with technical analysis indicators. Let’s dive in!
Moving Averages:
Moving averages calculate the average price of a currency pair or any other asset over a specific period, such as 10 days or 50 days, to reveal the trend. By plotting these averages on a chart, you can easily spot if prices are going up or down. They help you identify potential buy or sell signals to make trading decisions like a pro!
Relative Strength Index (RSI):
RSI helps you measure the strength and momentum in the markets. This oscillator ranges from 0 to 100. When it goes above 70, it suggests the asset might be overbought. On the contrary, when it drops below 30, it indicates the asset might be oversold.
Bollinger Bands:
Bollinger bands are like dynamic rubber bands hugging the price chart. They consist of a moving average line in the middle, with two bands above and below, representing standard deviations from the average. When the price moves close to the bands, it could mean a surge in volatility. Bollinger Bands are perfect for identifying potential price breakouts or reversals so that you won’t miss those exciting trading moments!
Summary
You can combine these indicators to build your trading superpower! For example, you might use moving averages to spot trends, RSI to identify overbought or oversold conditions, and Bollinger Bands to confirm potential breakouts. The possibilities are endless, and by blending different indicators, you can develop your own unique trading strategy.
Technical analysis in forex trading is like solving a puzzle using historical price data. It helps us understand the past and make predictions about the future.
What is Technical Analysis?
By studying these puzzle pieces—patterns, trends, support and resistance, and using indicators—we can make predictions about future price movements. But remember, technical analysis is not foolproof. It’s like a game of probabilities, where we use historical clues to make educated guesses about what might happen next. It’s important to combine technical analysis with other forms of analysis, like understanding economic news and managing risks.
By learning technical analysis, people can develop a better understanding of how prices move in the forex market and use this knowledge to make more informed trading decisions. It’s like being a detective, solving puzzles and making predictions based on the clues we find in the charts. Just like any skill, practice and continuous learning are key to becoming better at technical analysis.
Key Components of Technical Analysis
As we mentioned above, traders rely on various clues from the past to predict the future. And here are some key clues frequently used to make predictions:
Price charts:
Price charts show the historical prices of a currency pair, like a line graph or candlestick chart. These charts display the ups and downs in currency prices over time.
Patterns and trends:
Traders look for patterns and trends in the price charts. They observe how prices have moved in the past to identify similar patterns that might happen in the future. For example, they might notice that every time the price goes up a certain amount, it tends to come back down, or vice versa. These patterns are used to predict when the price might go up or down next.
Indicators:
Traders use indicators, which are special calculations based on price data, to obtain more market information. For example, they might use moving averages, which show the average price over a certain period, to identify trends. They can also use oscillators, which help determine if a currency is overbought or oversold.
Summary
Traders can make predictions about future price movements by relying on technical analysis.
Technical analysis consists of many key components, such as price charts, patterns and trends, and indicators.
If you have read our article “Introduction to Technical Analysis”, then you must be aware of the significance of technical analysis, which is used by master traders to predict the ups and downs of the financial markets. In this article, we are going to lift the curtain on the myth of technical analysis: Charts!
Line charts:
Let’s start with the most beginner-friendly chart: the line chart. Line charts display the closing prices of a currency pair, stock, crypto, or any other type of financial asset, over a specific time frame, and these price dots are connected with a line.
This straightforward chart gives a clear picture of price movements, convenient for you to take a quick glance at the market’s overall trend.
Candlestick charts:
Candlestick charts are like little rectangles with wicks on top and bottom. These candles stand for price movements within a specific time period (maybe an hour or a day). The body of the candle indicates the opening and closing prices, while the wicks reveal the highest and lowest prices during that time. By taking advantage of candlestick charts, you can access more details about the magnitude of price movements.
Bar charts:
Bar charts resemble vertical lines with small dashes on each side. The top dash represents the highest price, the bottom dash the lowest price, and the vertical line the opening and closing prices. Sounds like candlestick charts? That’s right. Bar charts are just like cousins of candlestick charts, providing similar information with just a slightly different look.
Summary
Charts help us unravel patterns, trends, and potential price movements. By analyzing these charts, you can make reasonable predictions about where prices might head next, giving you a competitive edge in CFD trading. Charts are your trusty companions to embark on the thrilling journey of trading.
First things first, FOMC stands for the Federal Open Market Committee. Think of it as the mastermind behind the scenes, making decisions that can send shockwaves through the financial markets. In this article, we are going to walk you through the FOMC Meeting, and explain why it is a big deal for you.
Interest rate decision:
Imagine you are at an amusement park, and the FOMC is controlling the speed of the roller coaster. Interest rates are just like the gas pedal for the economy. When the FOMC decides to raise interest rate, borrowing money becomes more costly. This can cool down an overheated economy and tame inflation. On the other hand, when they lower interest rates, borrowing money becomes cheaper, thereby boosting spending and investment. These rate decisions can jolt the values of currency pairs, stocks, or commodities.
Market mood:
Experienced traders tend to analyze every word the FOMC utters during the meeting to predict what’s coming next. If the FOMC hints at rate hikes, traders might expect currency values to rise. If they signal rate cuts, stock prices might skyrocket. You may grab a competitive edge by hunting for clues from their statement.
Volatility swing:
FOMC meetings can feel just like a roller coaster. Currencies might leap, stocks can soar or plummet, and commodities might go on a wild ride. The thrilling volatility may catch inexperienced traders off guard. That’s why knowing when the FOMC is meeting and preparing for their announcements is a savvy move.
Summary
In a nutshell, FOMC decisions about interest rates will impact economies and market expectations, and send waves around the globe. For CFD traders, knowing these meetings and how they can shape the markets will give you an upper hand.
Fundamental factors are like puzzle pieces that shape the big picture of the financial world. These factors can influence the value of assets such as currency pairs, stocks, commodities, and even cryptos. In this article, we will uncover such key factors, which often create opportunities for intelligent investors and traders.
Geopolitical events:
Geopolitical factors like wars, elections, trade deals, or conflicts can cause ripples in the markets. Positive events can boost investor confidence, while negative news can trigger uncertainty. You are highly recommended to stay updated on global affairs to anticipate how they might impact your trades.
Economic indicators:
Economic indicators are like the scoreboard, showing the health of a country’s economy. When GDP (Gross Domestic Product) goes up, it’s a sign of economic strength. Low unemployment rates mean people have jobs and money to spend. Inflation, the rise in prices, affects consumers’ buying power. And interest rates set by central banks can make borrowing cheaper or pricier. These indicators affect market sentiment, and understanding them gives you an edge.
Corporate earnings:
Corporate earnings can reveal how well a company is doing. Strong earnings mean the company is making money, which can lead to higher stock prices. Keep an eye on quarterly reports and profit margins – they’re your insider’s ticket to predicting movements of stocks and indices.
Natural disaster or climate events:
Imagine you’re a scientist observing nature’s forces. Natural disasters like hurricanes, earthquakes, or droughts can disrupt supply chains and affect commodity prices. Climate events, like changing weather patterns, impact agricultural products. Keeping an eye on these factors helps you anticipate potential market shifts.
Market sentiment:
Imagine you’re a scientist observing nature’s forces. Natural disasters like hurricanes, earthquakes, or droughts can disrupt supply chains and affect commodity prices. Climate events, like changing weather patterns, impact agricultural products. Keeping an eye on these factors helps you anticipate potential market shifts.
Summary
By understanding fundamental factors, you can predict how the market might change. For example, if an economic indicator suggests a strong economy, you might expect stock prices to rise. If geopolitical tensions increase, currencies might fluctuate.
In a word, fundamental factors are the driving forces behind price movements. Understanding them will give you a competitive edge.
If you are eager to understand the magic behind the financial markets, look no further than fundamental analysis! It’s time to unlock this exciting aspect of CFD trading and show you how to take advantage of it like a pro.
What Is Fundamental Analysis?
Fundamental analysis is all about exploring the real factors that drive the prices of financial assets like currency pairs, stocks, commodities, or cryptos. Unlike technical analysis, fundamental analysis focuses on the big picture, considering economic, financial, and geopolitical factors that influence an asset’s value.
Key Factors in Fundamental Analysis
Geopolitical Events:
Geopolitical events, like elections, trade deals, or conflicts, can cause turbulence in the financial markets. They play a role in shaping investors’ confidence and affecting asset prices. Keep an eye on global news and how it impacts the markets.
Economic Indicators:
Economic indicators are like clues that help you understand the health of a country’s economy. Key indicators include GDP (Gross Domestic Product), employment rates, inflation, and interest rates. When these indicators show a strong economic signal, asset prices might rise. But if they reveal weakness, prices could fall.
Company Performance:
If you’re trading CFDs on individual stocks, it’s essential to investigate the companies behind them. Look into their financial reports, earnings, and growth prospects. A company with solid earnings and exciting projects may attract more investors, boosting its stock price. But beware of companies facing challenges, their stock prices might take a dip.
Summary
Fundamental analysis is key to revealing the hidden treasures of the financial markets. It can help you understand the true value of assets and the factors that drive their prices. By combining fundamental analysis with technical analysis, you will be well-equipped to tackle the thrilling world of CFD trading.
Fundamentally speaking, the US released retail sales in July increased by 0.7% mom. The figure for June was also revised up to 0.3% from 0.2%, suggesting the U.S. economy continued to expand in 3Q and avoid recession. Consequently, inflation stays still in the short run. With demand remaining resilient and labor market tightening, curbing inflation has become a tricky problem for the FED. We believe gold is heading for a bounce.
Technically speaking, the gold daily has come to a key support zone – the 240-day moving average .
(Gold daily cycle, Ultima Markets MT4)
The 240-day moving average has been a supportive position for gold since 2022. The gold price made small fluctuations in the supportive zone during the past week, nevertheless, the stochastic oscillator signaled a golden cross yesterday.
(Gold in 1- hour period, Ultima Markets MT4)
In 1-hour period, the gold price went down again after stepping back on the 65 – period moving average yesterday, but it did not fall below the previous low. Looking at the overall structure, the gold price has a probability of forming a bottom structure. After the price breaks through the previous suppressed position, please make sure if the ATR combination indicator shows an effective breakthrough.
(Gold in 1- hour cycle, Ultima Markets MT4)
According to the pivot indicator in Ultima Markets MT4, the central price is 1902.54,
Bullish above 1902.54, the first target is 1909.10, and the second target 1917.99.
Bearish below 1902.54, the first target is 1893.94, and the second target 1887.37.
Disclaimer Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
Fundamentally speaking, although Fed’s rate hike coming to an end, the U.S. dollar index continues to rise. According to data released by the CFTC last week, the short positions fell to the lowest level in eight weeks. Short-covering is fueling a rebound in the U.S. dollar index as hedge funds continue to trim their short positions.
(US 10 -Year Treasury Yield vs EU 10 -Year Treasury Yield)
During the tightening monetary cycle, the spread of long-term bonds between the United States and Europe drives arbitrage funds to buy dollar and sell euro. In the short term, the spread deliveries adjustments to the exchange rate.
Technically speaking, the EUR/USD daily cycle completed a breakout of last Friday’s low yesterday. The market has a high probability of ushering in a downward trend in the next two days.
(EUR/USD daily cycle, Ultima Markets MT4)
The exchange rate fell below multiple moving averages and was blocked by the 61.8% golden ratio Fibonacci retracement position yesterday. Today there is a certain probability of stepping back on the moving average or consolidating prices, but if today’s market continues to fall below yesterday’s low, the euro will remain weak against the dollar.
(EUR/USD daily cycle, Ultima Markets MT4 )
From the perspective of daily structure, there are two key support positions below the level, 1.0836 is the potential target, and 1.0639 is the extremely critical long-short boundary. If all supportive levels are crushed, a deep correction will come along.
(EUR/USD in 4 -hour cycle, Ultima Markets MT4)
In 4- hour cycle, bull and bear are in entanglement. The Stochastic Oscillator displays a golden cross to indicate the bull, but the exchange rate maintains a downward trend. It means that the decline is not firm enough, and the rebound is still strong.
(EUR/USD in 1- hour cycle, Ultima Markets MT4)
In 1- hour cycle, the price still has the probability of stepping back on the moving average and resistance level. If Stochastic Oscillator shows a dead cross later on, please look for short trading opportunities.
According to the pivot indicator in Ultima Markets MT4, the central price is 1.09147,
Bullish above 1.09147, the first target is 1.09537, and the second target 1.09993.
Bearish below 1.09147, the first target is 1.08680, and the second target 1.08284.
Disclaimer
Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
