Euro, British Pound Gains Threatened with Key GDP, CPI Data on Tap (Euro Open)

The Euro and the British Pound may reverse recent gains as UK first-quarter GDP is revised lower while Euro Zone CPI slips into negative territory, threatening deflation. The US Dollar fell -0.4% in overnight trading as Asian stock markets extended the rally seen on European and US exchanges, sapping demand for safety-linked currencies.

Key Overnight Developments

• Japanese Economy Sheds 440k Jobs, Unemployment Rate Rises
• Australian Lending to Private Sector Unexpectedly Fell in May
• US Dollar Slumps as Stocks Extend Gains in Asian Trading

Critical Levels

The Euro and the British Pound advanced in overnight trading, adding as much as 0.4% and 0.6% against the US Dollar, respectively. The greenback fell in overnight trading as Asian stock markets extended the rally seen on European and US exchanges, sapping demand for safety-linked currencies.

Asia Session Highlights

Japan’s labor market continued to deteriorate in May: the economy shed a staggering 440k jobs, pushing the Jobless Rate to 5.2%, the highest in over 5 years. Meanwhile, the ratio of available vacancies to job-seekers fell to 0.44, the lowest since records began in 1963. Continued job losses will weigh on disposable incomes and trimming spending. Indeed, retail trade came to a standstill in May while minutes from the last meeting of the Bank of Japan has said that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” While Household Spending unexpectedly rose 0.3%, the first increase in 15 months, the improvement is unlikely to be sustainable and likely owes to the temporary boost from the government’s record-setting $25 trillion yen stimulus package as well as the rebound in share prices (the Nikkei benchmark index has surged 42% to date since early March).

Separately, the Nomura/JMMA Manufacturing PMI figure rose for the fifth consecutive month in June, printing at 48.2. A reading below the 50 “boom-bust” level that suggests the manufacturing sector continues to decline, but at the slowest pace since January. It is quite telling that companies continue to cut jobs even as PMI figures improve, suggesting any improvements in recent data owe to inventory adjustments rather than a meaningful recovery. The dismal outlook for global trade in 2009 and 2010 means that export-oriented Japanese firms are likely to keep output level low and labor forces lean, making any sustainable rebound in GDP growth a distant prospect for the world’s second-largest economy.

Australia’s Private Sector Credit unexpectedly shrank in May, falling -0.1% versus forecasts of a 0.2% expansion. The annual pace of credit growth fell to 3.9%, the lowest in over 15 years. Loans to businesses fell -0.7%, the most since December 2008, hinting that companies are delaying expansion plans and suggesting that unemployment will remain a concern in the months ahead. Indeed, a survey of economists conducted by Bloomberg calls for the jobless rate to hit 5.9% this year and top 7% in 2010.

Euro Session: What to Expect

The final revision of UK Gross Domestic Product is expected to reveal the economy shrank -2.1% through the first quarter, a greater contraction than the originally-reported -1.9% decline. In annual terms, GDP is expected to have shrunk at a pace of -4.3%, the fastest in at least 53 years. The most recent GDP forecast from NIESR, a think tank, suggested the turmoil may slow in the second quarter of the year, predicting that March was “the trough of the depression, with output rising in April and May.” A validation of such an outlook in the forthcoming data would surely lift a great deal of pressure from the shoulders of policymakers who have effectively exhausted most stimulus options. Indeed, the government is unlikely to offer much more of a boost with the fiscal gap expected to reach a whopping 14% of GDP by next year, while the central bank has already slashed rates to a meager 0.5% and embarked on quantitative easing. On balance, consensus economic growth forecasts suggest that the UK will trail behind the US but outpace the Euro Zone through the end of 2010, suggesting the Bank of England will follow the Fed but lead the ECB in lifting interest rates as the recovery takes hold. All told, this points to a bearish bias for both GBPUSD and EURGBP in the months ahead.

Turning to the Euro Zone, a preliminary estimate of the Consumer Price Index is expected to show that prices shrank at an annual pace of -0.2% in June, the first negative reading on record since the creation of the single currency in 1991. The latest PPI report supports continued pressure on consumer prices, with forecasts calling for wholesale inflation to shed -5.6% in the year to May. Entrenching expectations of lower prices threatens to commit the currency bloc to a long-term period of stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment. German labor-market figures are also on tap, with expectations calling for the EZ’s largest economy to shed 45k jobs in June to push the Unemployment Rate back to a 16-month high at 8.3% after the metric slipped to 8.2% in the previous month. Job losses will weigh on consumer spending, the largest contributor to overall economic growth, keeping a lid on any substantive recovery in GDP growth in the months ahead. The prospect of deepening recession and an increasingly credible deflationary threat have boosted expectations that the European Central Bank will cut interest rates later this week, with overnight index swaps suggesting the market now sees a 56.5% chance of a 0.25% reduction.

Rounding out the session, the UBS Consumption Indicator that aims to forecast the trend in private spending in the coming 3-4 months is likely to fall to a fresh 4-year low in May as the pace of unemployment continues to push higher, ticking up to a seasonally-adjusted rate of 3.5% in the same period for the first time since March 2006.

Written by Ilya Spivak, Currency Analyst
Euro, British Pound Gains Threatened with Key GDP, CPI Data on Tap (Euro Open)
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.

The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.


List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!