Spread Betting Forex
Always moving day and night, sensitive to any piece of information, and one of the most liquid markets, Forex attracts institutional and retail investors looking to hedge positions, explore currency yield differences and speculate on any profit opportunity.
The Forex market is constituted by several pairs and crosses always presented as a two-sided trade: a long currency and a short one. EUR/USD, AUD/USD, and EUR/CAD are just some examples. When you trade the EUR/CAD cross, for example, you are long the Euro and short the Canadian Dollar. You are buying the Canadian Dollar with the Euro.
A fundamental question arising that needs a technical explanation is: what drives a currency up and down?
The short answer is: everything. Currencies are very sensitive to every piece of information and almost everything matters in some way. The earthquake in Japan drove the yen massively higher on the expectation of repatriated funds to help on rebuilding the country. The rise in inflation in Europe drove the Euro higher. The high yield given by interest rate in Australia has also been the engine for carry trades driving the Aussie higher. Political instability in MENA region shifted the Swissy higher on risk aversion moves. And even Osama Bin Laden death had its impact in the USD pairs.
Many traders disregard all these fundamental events and assume they are all already included in a currency price, so charts will tell about the most probable path a currency will follow. Forex markets attract a large number of technical analysts using several trading strategies based on chart signals.
Although fundamental events have a major impact in Forex and charts can help develop the best strategy to explore it, interest rate is the key driver of a currency value. Most fundamental data like unemployment reports and GDP growth rates have major impacts in currency prices but the main reason is the impact such reports have in interest rate expectations, more than anything else. Higher than expected GDP growth and lower unemployment rate, raise expectations of an interest rate hike that in turn raise the currency yield and demand. Such increase leads to higher currency prices.
What really matters is the interest rate differential between the two sides of a pair or cross and the expectations about that differential for the future. The US dollar has been under heavy selling since the beginning of this year. The FED has been concerned about high unemployment rates and low GDP growth rates and implemented a monetary easing policy of printing money until next June. In the Euro zone the main economies as France and Germany are giving signals of growth picking up and inflation is concerning the ECB that has already increased the interest rate by one time this year and gave the expectation that more hikes are still to come. As a result the interest rate differential between the Euro and the USD increased and is expected to further grow. This drove the Euro higher to almost 1.50 against the USD. Latest dovish comments by Jean Claude Trichet in ECB May meeting drove down expectations about another interest rate hike in July resulting in a fast bearish movement of the currency from almost 1.50 to 1.42.
If you want to be successful trading currencies you need to carefully monitor all the news that can have an impact on the particular market you want to trade. With so much information available, you need to select what really matters and understand what is the impact in future interest rates. Then you can make your selections and trade this highly transparent market that does not suffer from any management negative surprises as companies.
Financial spread betting providers offer many currency markets to trade at decent spreads. You can trade the pair EUR/USD at major companies like IG Index with a spread of just 1 pip.