6.16.2009

Euro, British Pound Selling May Accelerate As CPI Reports Stoke Deflation Fears (Euro Open)

The Euro and the British Pound may see selling pressure accelerate as May consumer price index results bolster fears that Europe may slip into deflation. The June edition of Germany’s ZEW survey of investor sentiment is also on tap.

Key Overnight Developments

• BOJ Keeps Rates at 0.10%, Upgrades Economic Forecast for 2nd Month
• RBA Meeting Minutes Hint Australia May Cut Rates Again This Year

Critical Levels



The Euro ended the overnight session little changed against the US Dollar as prices retraced having tested as low as 1.3749 after stocks tumbled in Asian trading. The British Pound bore the brunt US Dollar strength, slipping as much as -0.6% before recovering a bit ahead of the opening bell in Europe.

Asia Session Highlights



The Bank of Japan kept interest rates unchanged at 0.10% as was expected. Policymakers said that “economic conditions have began to stop worsening”, raising its economic forecast for the second consecutive month. That said, the BOJ continues to see downside risks to economic growth and said inflation may decline more than expected. Although Maasaki Shirakawa and company said “exports and production have begun to turn upward”, the dismal outlook for global trade volumes in 2009 and 2010 from the IMF suggests otherwise, arguing that a robust recovery for the export-dependent country will remain elusive for the time being, leaving output and employment levels at the lower end of the spectrum. Indeed, the current account surplus shrank more than expected in April as overseas sales tumbled -40.6%.

Minutes from the last meeting of the Reserve Bank of Australia bolstered governor Glenn Stevens’ earlier comments suggesting policymakers may reduce interest rates again in the months ahead. While the RBA again asserted that the full effects of standing monetary and fiscal stimulus are yet to be fully reflected in the broad economy, the bank said the current inflation outlook “gives scope” for rate cuts if needed. Policymakers also acknowledged that the recent appreciation in the Australian Dollar have reduced the impact of stimulus measures.

Euro Session: What to Expect



The UK Consumer Price Index report is expected to show that the annual pace of inflation to fell to 2.0% in the year to May, the lowest since September 2007. Although the reading is still within the Bank of England’s target parameters, continued economic weakness is likely to push price growth lower. Indeed, a survey of economists conducted by Bloomberg is calling for GDP to continue to shrink at least through the first quarter of next year, sending CPI below 1% by the third quarter of this year. The Bank of England has said that such extremes will be temporary, with prices recovering to 1.4% by the end of next March. However, these forecasts are based the assumption that the economy will grow 0.2% next year, a claim that is contested by the International Monetary Fund which expects the UK will shrink -0.4% in 2010. If the IMF outlook proves correct, prices could well drift into negative territory, threatening to substantially extend the current downturn as expectations of deflation encourage consumers and businesses to wait for the best possible bargain and perpetually hold off on spending and investment.

Turning to the continent, the Euro Zone Consumer Prices Index is set to show that annual inflation came to a standstill in May having registered at a record-low 0.6% in the previous month. As we noted last week, the currency bloc now faces a credible deflationary threat, arguing for a far more forceful monetary response than anything that has been introduced by the European Central Bank thus far. Overnight index swaps suggest that traders are pricing in virtually no chance that the ECB will lower rates at the next policy meeting and quantitative easing will be difficult to expand beyond the modest measures announced earlier this month given the internal conflict about such policies within the central bank. This opens the door for traders to punish the Euro as they price in expectations that the region will substantial lag behind other industrial economies in seeing economic recovery, forcing interest rates to stay lower longer than elsewhere.

Separately, Germany’s ZEW Survey of investor sentiment is expected to rise to 35.0 in June from 31.1 in the previous month, registering at the highest level in three years. However, improvements in the metric are unlikely to offer much near-term support to the single currency: the ZEW reflects the forward-looking perspective of the survey respondents, meaning the reading tends to lead the Euro by a significant margin such that the trend in the Expectations component inverts major tops and bottoms in the exchange rate. Specifically, the ZEW began to trend lower in the beginning of 2006 and bottomed out in July of last year; the same end-points mark the beginning of the last major uptrend in EURUSD that saw the pair test record highs above 1.60. If the same dynamic is to continue to hold, traders can expect the European unit to set a bottom as the ZEW tops out, a scenario that seems unlikely for the time being considering how much ground remains to be covered before the economy regains firm footing.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro, British Pound Selling May Accelerate As CPI Reports Stoke Deflation Fears (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.

Currencies

Currencies
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.

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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.

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