Hi everyone,
This week I thought I’d give you a little breakdown on the FED and interest rate differentials. I’ve got a feeling that this information will be crucial for, especially, Forex trading in the coming year. Hopefully you will also understand why it is ‘red flag’ news.
The Federal Reserve, also known as the “Fed,” is the central banking system of the United States. It was established in 1913 by Congress with the goal of providing a stable and flexible monetary and financial system in the country. The Federal Reserve has three main functions: monetary policy, supervision and regulation of banks and financial institutions, and maintaining the stability of the financial system.
One of the primary responsibilities of the Fed is to control the money supply in the economy. The Fed’s monetary policy decisions impact the interest rates, inflation, and economic growth of the country. The Federal Reserve conducts monetary policy through various tools such as setting the federal funds rate, open market operations, and reserve requirements for banks.
The FED is also responsible for supervising and regulating banks and other financial institutions to ensure their safety and soundness. The Fed oversees and regulates the financial system through various laws and regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Another important role of the Fed is to maintain the stability of the financial system. This involves providing liquidity to financial markets during times of stress, such as during the 2008 financial crisis, through various lending facilities and programs. The FED is governed by a Board of Governors located in Washington, D.C., and 12 regional Federal Reserve Banks located throughout the country. The Board of Governors is responsible for making monetary policy decisions and supervising and regulating the Federal Reserve Banks.
Interest rate differentials:
Interest rate differentials refer to the difference in interest rates between two countries or financial markets. These differentials can have important implications for international trade, capital flows, and exchange rates.
In general, interest rate differentials arise because of differences in monetary policies and economic conditions between countries. Central banks may adjust their policy interest rates in response to inflation, economic growth, or other factors. These changes can cause interest rate differentials to widen or narrow over time.
When there is a higher interest rate in one country compared to another, it creates an incentive for investors to invest their money in that country’s financial markets. This is because they can earn a higher return on their investment due to the higher interest rate. As a result, this can lead to capital inflows into that country, which can strengthen its currency relative to other currencies.
On the other hand, when there is a lower interest rate in one country compared to another, investors may withdraw their investments and seek higher returns elsewhere. This can lead to capital outflows from that country, which can weaken its currency.
Interest rate differentials can also affect international trade. When one country’s currency strengthens relative to another’s, it can make the first country’s exports more expensive and less competitive, while making imports from the second country cheaper. This can lead to a trade imbalance between the two countries.
Overall, interest rate differentials can have significant effects on international financial markets, trade, and exchange rates. Investors and policymakers alike closely monitor interest rate differentials and their trends to make informed decisions about investments, trade, and monetary policy.
Let’s look at some charts.
DXY:
Consolidating at the 200. Very much a make your mind up area.
Energy & Metal Prices;
Gold;
A weaker Dollar helped Gold this week. Notice how it bounced off the massive 1800 level.
Oil;
Also helped by a weaker dollar. Some political news came out this week though, so be careful if you trade oil.
Bitcoin;
Not a great week for the crypto market, heading back into my range I’ve shown before.
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Red flag news:
A lot of landmines to avoid this week. Friday is the BIG day this week, but watch out for Powell’s speech on Wednesday (GMT +2).
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MAJORS
EUR/USD: Make your mind up area. Would look to long if it breaks above 1.0650. If it breaks below 1.0500 I’d look to short.
USD/CHF: There was an opportunity to short from 0.9450 this week. Looking for that again.
GBP/USD: Short from the current level looks interesting n the smaller timeframes. If it breaks above 1.2300, I’d look to long.
AUD/USD: Short from 0.68400
NZD/USD: Short from 0.6300
USD/CAD: Long from 1.3300 or 1.3000. No mans land now and oil seems to be strengthening .
USD/JPY: Long from 134.00.
CROSSES
EUR/GBP: Long from 0.8700 but a little messy.
EUR/NZD: Long from 1.6850.
EUR/AUD: Long from 1.5600
*EUR/CHF: Came close to closing above parity. See video.
AUD/JPY: Long from he current position. *See video.
CAD/JPY: Short from 99.00
AUD/NZD: *See video.
GBP/CAD: Long from the current position.
As always, remember correlation! -Especially when taking more than one JPY trade!
M3 -Shorter timeframes.
I do my analysis on daily and weekly charts first and make a note of the MAJOR areas of support and resistance. Then copy them onto Pierre’s Earth and sky template. Then I make a note of the weekly & monthly pivots points and add them to the charts. You will see lots of opportunities line up during the week. The important thing then is to select a bias for the next few days and do NOT take trades if the price is too near a trend line or pivot. Ideally, you want to buy when the price is near a major support and or pivot point line and has the potential to make at least 40 pips. Vice versa for a short.
New members, please note: If I am looking to take a trade long, for example, 1.5000, I place my order 10 pips above & 10 pips below for a short. This is because price often does not quite reach a major line and you need to allow for spreads.
We are NOT a “tipping service” our aim is to teach you how to trade for yourself.
Watch the video below for more detailed explanations of this week’s analysis and trade plan (click the 4 arrows bottom right to view full-screen):
Regards
Thinus
