Forex trading, speculating on whether the value of currency pairs will go up or down, can be one of the most rewarding ways to make money on the international markets today. Many investors major on Forex and focus less on the major indices or stocks, and on commodities like oil and metals.
One reason is volatility. Traders love it when price movements are significant and regular because shifting price points gives them the opportunity to go long or short. In other words, they have plenty of chances to profit.
A second attraction is leverage to be had in the Forex markets, meaning that for every dollar you invest, the broker actually trades much higher, effectively loaning you the extra money. There are complicated formulas at work here, but once you’ve grasped the basics, you can begin to take advantage of leverage in Forex trading.
Understanding the mechanics of how to trade Forex is one thing. The hardest part is beginning to understand what makes the currency prices move and, of course, to begin to predict those moves in order to profit. While that’s all well and good, you might find the market has also predicted an event, and the price movement has already been taken into account.
A good trader will understand the importance of inter-market analysis when studying currency pricing.
What is Forex inter-market analysis?
Put simply, this analysis recognises there are other market forces at work when determining the price movement of a currency. Four major markets impact on each other: stocks, bonds, commodities and currencies.
There are some common threads. It’s generally widely considered that if stock indices like Wall Street or the FTSE 100, and currencies suffer major damage, the price of commodities rises. Gold is a perfect example of a “safe haven”, a long term safe bet for your money if you have to ditch stocks.
The benefit of Forex is that you can, of course, “bet” on the currency pairing price falling. So you could ditch falling stocks, go short on a falling currency pair, and buy into gold. A win, win, win, it seems.
Sadly, it’s not as simple as that. There are many factors at work. Some signals may be false; you might get on board a trade too late, or, as mentioned earlier, the market may already have taken “news” or an event into account.
That said, there are some forces that will come into play in 2019 that should produce ideal inter-market conditions for Forex trading. Here are three to watch out for.
Britain’s Brexit dilemma
We’ve known Brexit is coming since the people of Britain voted to leave the European Union back in 2016. Extraordinarily, we’re now only weeks away from breakaway and no-one knows what form Brexit will take: a brokered agreement with the EU, a “hard” Brexit without a deal or even no Brexit at all, if some campaigners have their way.
What is clear is that Brexit has the power to impact severely on the value of the British pound. After the initial Brexit vote, the value of the pound, and therefore the GBP/USD currency pair plummeted.
The chart shows the GBP/USD currency pair. Note how the value plunged in late June 2016 when Britain voted to leave the EU. Further falls were than followed by a long rally as the markets predicted Brexit might not be so bad for the British economy after all. It bounced off a double top twice early last year before falling away again as uncertainty rose over what political agreement might be in place. Since the summer, the price has bounced around in a price band as nobody seems to predict what will happen.
But we’ll know how Brexit will shake up at the end of March, and inter-market conditions between stocks and currencies will move the market. How quick a Forex trader can jump on the move will determine what profit (or loss) can be made.
The continued strength of the US economy
The success or otherwise of the US economy drives not only domestic stock markets in the US but also the strength of the USD against other currencies.
In the past 12-18 months, the US financial news has been buoyant. Employment is at record levels, but despite significant rises in Dow Jones throughout 2017, 2018 was more stable. That “check” in the Dow was partly down to the US Federal Reserve hiking interest rates (no less than four times in the year).
While it may have pegged back stocks, those interest rate rises buoyed the value of the USD. In 2019 there are signs more interest rate rises, although in small increments, may follow. This could help send up the USD value once again.
Oil price recovery may impact currencies
On the assumption that inter-market forces dictate a correlation between commodity price movements and stocks and currencies, it’s interesting to see what happens to the price of oil in 2019.
After a calamitous fall in the last quarter of 2018, with US crude falling from around $76 a barrel to $44, there has been a steady recovery since, to $52. If the price continues to climb back to the levels of mid-2018 and beyond, investors might dive into oil at the expense of stocks and foreign currencies.
As ever, look before you leap
The dynamics between different market forces as well as developing worldwide events will all have an effect on the value of currencies, and your Forex trading decisions. The best advice is to undertake as much technical analysis as you can, including inter-market influences, before taking up any position.