This publication aims to help fulfil the mission of “Applications In Life” Fondation to support and develop accessible and understandable financial education by improving financial culture and forward-thinking mentality of the civil society.
The forex market is driven by economic factors, that affect the value and strength of the national currency. The economic outlook for a country has the greatest impact on the value of its currency. Knowledge of monitoring factors and metrics will help you keep pace in the competitive and fast-paced forex world.
Fundamental analysis focuses on economic theory and the political factors that influence supply and demand. It examines the cause of exchange rate movements, while the technical clarifies the effects of these movements.
Part of the fundamental analysis includes capital market research and policy discussions on currency levels, while another part looks at macroeconomic indicators such as: economic growth rates, gross domestic product (GDP), interest rates, inflation, unemployment, money supply, foreign bank reserves, performance data and more.
Political factors are determined by the level of trust and stability of governments and their policies. The results of such studies explain the current exchange rate fluctuations and predict future movements.
Purchasing Power Parity / PPP /
PPP claims that exchange rates are determined by the relative prices of similar consumer baskets of goods from two countries. Hence, changes in the level of inflation must be offset by an equal in magnitude, but in the opposite direction, a change in exchange rates.
A major weakness of the PPP is the assumption that international trade is taking place at no cost, such as transportation and duties, this theory also ignores the importance of services. PPP is only applicable as a means of forecasting prices over the long term (3-5 years).
Interest rate parity / interest rate differential /
According to this theory, the appreciation (depreciation) of one currency against another must be offset by a change in the interest rate differential. / If US interest rates are higher than those in Japan, then the dollar should be depreciated against the yen, preventing risk-free arbitrage. / Future exchange rates are reflected in the forward rates currently set. Since 1990, this theory has not shown good results in forecasting exchange rates, but on the contrary, currencies with higher interest rates are more likely to rise under the influence of inflation and deposit yields.
Balance of Payments Approach / Elasticity Theory /
According to this model, exchange rates should be in equilibrium at levels corresponding to the equilibrium level of a country’s trade balance with that of another (current account balance). A country with a foreign trade deficit “suffers” from a reduction in the foreign exchange reserves of its central bank, leading to a depreciation of the national currency. That is, if one country’s imports are large, the trade balance is weak. After a certain period, due to a fall in imports and an increase in exports, the exchange rate and the trade balance tend to reach their equilibrium level.
This approach mainly focuses on international trade in goods and services, ignoring the enormous importance of trading on the international financial markets. Capital inflows are reflected in the balance of payments capital account by balancing the current account deficit (resulting from trade in goods and services).
This theory / the portfolio-balance approach / states that the demand for currency is conditioned more by the demand for funds than the currency itself.
The large growth in trading in financial assets / stocks and bonds / changes in the models used to analyze the exchange rates. Economic variables, such as: growth, inflation, productivity, are no longer the main factors that shape exchange rates. The turnover in the international monetary market resulting from transactions in financial assets exceeds many times the turnover serving trade in goods and services. For this reason, the exchange rates are directly influenced by the performance of the stock markets of individual countries / good development and the growth of a certain capital market lead to the appreciation of the respective currency /.
In order to adapt these theories to the realities of the market, more serious conditions have been created for the synthesis of traditional and contemporary monetarist theories. The short-term outflow of capital caused by financial turmoil creates a balance of payments disturbance, necessitating the need to adjust the exchange rate to restore balance of payments. Speculative aspirations, volatility in the commodity market and the presence of short-term capital movements cause volatility in the exchange rate. The degree of change in the exchange rate is a function of the elasticity of consumer demand. To the extent that financial markets are more adaptable than commodity markets, the exchange rate of the currency is influenced by short-term changes in commodity markets.
Fundamental Analysis Indicators
Economic indicators enter the market on a regular basis, at a fixed time and at a much higher frequency than changes in interest rates, change of governments and natural disasters, such as earthquakes and others. They are usually published on a monthly basis, in contrast to the Gross Domestic Product and Employment Index data, which are published every 3 months. The economic indicator is a pair of numbers. The first number is the indicator for the reporting period and the second is the specified indicator for the previous month. If the value of the indicator for the last month is 0.4% better than expected, but the indicator for the previous month is adjusted by less than 0.4%, the trader may not pay attention to all other data! Information on economic indicators is published in all leading newspapers such as the Wallstreet Journal, Financial Times, New York Times, as well as in Business Week. Traders are actively using electronic sources such as Bridge Information Systems, Reuters, Bloomberg.
Auto Sales – The number of cars sold in a specific 10-day period. The timeliness of this indicator makes it the most accepted detail in US economic data.
Gross Domestic Product (GDP) – The monetary expression (at market prices) of goods and services produced in the economy over a period of time / year or quarter /. The cost of replacing fixed assets is not taken into account. Only consumer goods or investments are included. It is published together with the GDP deflator, which is obtained by dividing the current value of GDP by the reference value. It has been accepted that GDP deflator is considered to be a more significant measure of inflation.
Beige Book – Provides reports on economic conditions in each of the 12 areas designated by the Federal Reserve. It usually serves as an ancillary indicator of the Federal Open Market Committee and is issued prior to meetings concerning the determination of interest rates in the United States.
Federal Reserve Budget (Treasury Budget) – A monthly report on the federal government’s surplus or deficit. Changes in the deficit on an annual basis are an indicator of budgetary trends and fiscal policy confidence.
Import & Export Prices (Import & Export Prices) – Prices of goods purchased in a country and produced abroad and prices of goods sold abroad and manufactured in the country. The indicator is an indicator of inflation trends in internationally traded goods.
Money Aggregates – Monetary aggregates are an alternative measure of money supply and are divided according to the degree of liquidity of the components included in them. Changes in monetary aggregates are indicators of confidence in monetary policy, as well as of economic activity and inflationary pressures.
Philadelphia Fed Survey – A complex composite index of the state of the manufacturing sector located in a portion of the territory of the country managed by the Philadelphia Federal Reserve.
Index of Leading Economic Indicators – A complex index of ten economic indicators (economically applicable and statistically adequate) that have the most significant impact on economic activity. These include – the average weekly number of applications for unemployment benefits; the volume of orders for consumer goods and materials taking into account inflation; the volume of contracts and requests for factory equipment, the number of building permits issued; the number of backlogs from producers of durable goods; the average length of working week in mechanical engineering; commercial claims of suppliers failing suppliers.
University of Michigan Consumer Sentiment – A survey of consumers’ attitudes to the current situation as well as their expectations regarding economic conditions. The study is conducted by the University of Michigan every month among 500 people. The indicator is directly related to the level of purchased goods and services in the economy.
Consumer Price Index (CPI) – The consumer price index measures the average price level of a fixed basket of products and services purchased by consumers. They are divided into 7 categories: housing, food, transportation, medical care, clothing, entertainment and more, each of which is of significant importance. Monthly changes in the index are an indicator of the inflation rate, although in the opinion of the Federal Reserve System, this index and the producer price index overestimate the strength of inflation.
Harmonized Index of Consumer Prices (HICP) – This is the official measure of euro area inflation. Changing the price stability decipherment from below 2% to almost 2% gives the European Central Bank / ECB / additional flexibility on price risks.
Producer Price Index (PPI) – The Producer Price Index is a measure of the average price level of a fixed basket of capital and consumer products purchased from manufacturers. Unlike the Consumer Price Index, it does not include imported goods, services and taxes.
Mortgage Bankers Association Purchase Applications Index – A weekly index of home purchase applications from mortgage lending institutions. The indicator is a leading indicator of single-family home sales and home construction in the United States.
Help Wanted Index – An index of the number of rows separated by job ads published in the 51 largest newspapers in the United States within a given month. The indicator is an indicator of the state of the labor market.
Industrial Production and Capacity Utilization Rate – The Industrial Production Index is a measure of the output of manufacturing enterprises, mines and utilities in one country. The measure of capacity utilization reflects the total volume of industrial production, relative to the total production capacity. Its normal value for a stable economy is 81.5%, if 85% or more – the economy is close to reaching the maximum power that precedes inflation. In the foreign exchange market, this raises expectations that the Central Bank will raise interest rates to avoid or weaken inflation.
Personal income. Personal Income & Personal Consumption Expenditures (PCE) – The Personal Income Index is the dollar value of income received from individuals, non-profit organizations, and private equity. The components of this indicator include salaries, social benefits, property income, rent, dividends and interest, bank payments and more. The Consumer Cost Index includes purchases of durable and non-durable products as well as consumer services.
International Trade – The international trade indicator measures the difference between the imports and exports of products and services. The level of the indicator, as well as changes in the amount of imports and exports, are used to determine trends in trade abroad.
Jobless Claims – The total number of people who applied for unemployment benefits for the first time in a week. The indicator, and especially its average over the last 4 weeks, is used to determine trends in the overall unemployment rate in the country.
Housing Starts and Building Permits – Home Housing measures the number of residential buildings that begin construction each month. Housing is affected by changes in interest rates, most notably mortgages.
Durable Goods Orders – The Durable Goods Orders indicator reflects new orders placed with local manufacturers for both immediate and future deliveries of factory durables. These orders are extremely important as they anticipate changes in production and thus signal reversals in the economic process.
Consumer Confidence – A survey of consumers’ attitudes to the current situation and their expectations regarding economic conditions. The survey is conducted monthly by the Conference Board among 5,000 people. The indicator is directly related to the level of purchased goods and services in the economy.
Consumer Installment Credit – The dollar value of a given consumer payday loan. Changes in the indicator are indicators of the status of consumer incomes and upcoming changes in consumer expenditures.
Retail Sales – Retail sales measure the total receipts of stores selling durable and durable goods. This is the first indicator to measure consumer spending.
New Home Sales – The number of new home sales in a given month. This also includes information on home prices and the number of homes for sale. The level of the indicator is an indicator of trends in the home market.
Existing Home Sales – The number of completed sales of already built homes in a month. Sales of existing homes (the index is also known as “home resale”) occupy a larger share of the market than new homes and are an indicator of home market trends.
Manufacturing Sector ISM – The index tracks the state of the manufacturing sector in the US. Published monthly by the Institute of Supply Management (ISM). Values below 50 points indicate a recession in the manufacturing sector, while values above 50 points indicate expansion.
Services Sector ISM – The index tracks the status of the services sector in the US. Published monthly by the Institute of Supply Management (ISM). Values below 50 points indicate a recession in the non-manufacturing sector, while values above 50 points are indicative of expansion.
PMAC Survey (PMAC Survey) – The PMAC Survey of the Chicago Purchasing Managers Association is a complex index of the manufacturing sector status in the Chicago area, where the distribution of manufacturing firms reflects national distribution. Values above 50% indicate expansion of the manufacturing sector. The RMAC study is considered to be a leading indicator in the ISM study.
Productivity and Labor Costs – Productivity measures the growth of average labor productivity in the production of goods and services in an economy. The costs show the labor costs incurred in producing a unit of output. Both indicators are indicators of future inflationary trends.
Unemployment rate – The unemployment rate measures the number of unemployed as a percentage of the working population in a country.
Construction Spending – The monetary value of newly started residential and non-residential buildings as well as government-commissioned construction. The values of the indicator are given in nominal and real terms (adjusted for inflation).
Current Account – The most important element in the international trade balance of a country’s goods, services and one-sided payments. The current account level, as well as trends in exports and imports, are indicators of international trade trends.
Employment Report – In the US, it is also known as the Employment Report and is considered one of the most important of all economic indicators. Unemployment is one of the main components of the report and measures the percentage of unemployed people who are able to work, actively seek work, but cannot find one.
Wholesale Trade – The dollar value of sales made and stocks held by wholesalers. Wholesale trade is one of the components of the business stocks indicator.
Factory Orders and Manufacturing Inventories – The factory orders report describes the orders and shipments of durable and non-durable goods, industrial stocks, and more. The indicator gives better information than durable goods orders, the value of which is announced one or two weeks before.
Employment Cost Index (ECI) – A measure of aggregate compensation costs including salaries, wages and bonuses.
Business Inventories and Sales – The monetary value of inventories in the manufacturing sector as well as in the wholesale and retail sectors. It is an important indicator of the short-term trend in production activity and an important component of GDP, showing which part of final output remains unsold.
Redbook – A measure of sales made by major stores, which is published weekly.
Natural disasters and catastrophes
Usually, their influence is negative on the national currency of a country. The stronger a natural disaster is, the more negative it affects the national currency.
An example is the strong earthquake in Japan at the end of July 2007. It has had a profound impact on the economy, most notably the automotive sector of the world’s second largest economy. Afterwards, Toyota, Nissan, Suzuki, Mitsubishi and Honda companies announced that they were stopping production of some cars or entirely because of factory malfunctions. The world’s largest nuclear power plant, Tokyo Electric Power, has announced that it will stop operating for an unknown period of time. All of this automatically contributes to the decline of the basic index in Japan, the Nikkei-225, with which the yen slows down its victorious march against the dollar and enters the range.
The fundamental analysis of individual companies is specific, which examines the main and indicators giving an idea of its status. An analyst using fundamental analysis is looking for a company that other investors will value differently. Fundamental analysis is more labor intensive and the return on analysis in the presence of developed markets is lower. The probability of finding a company for which information and analysis is different from that of other investors and less. The analysis is for individual companies, including information about the industry and the economy. The income that every shareholder should expect is concentrated.
The fundamental analysis is related to the assessment of the financial position of corporations; according to analysts, changes in the company’s earnings affect the amount of dividends paid and the market value of its shares; Investment decisions are made after analysis of the main financial indicators of the company, as well as the management, marketing strategy and more. – on this basis, an estimate of the expected financial results is made. It is of interest to the investor to know the main indicators that are directly relevant to the valuation of the shares of the respective company:
1) Earnings per share – reflect the net income of the company that accrues to each of the ordinary shares; what matters is not the momentary value, but the trend.
2) Price-to-earnings ratio.
3) Dividend to price ratio – shows% return on dividend.
4) Ratio of current assets to current liabilities.
5) Debt ratio.
6) Net equity per share – reflects the portion of its equity of the company of each outstanding share, ie. the amount that each holder of a common stock would receive if the assets were sold at book value and all liabilities paid
Factors affecting the movement of USD
FED – Federal Reserve
The US Central Bank has complete independence in determining monetary policy in order to achieve inflation-free growth. The Federal Reserve achieves this mainly through: direct open market interventions, a change in the base rate and a change in the interest rate on the Federal Funds.
FOMC – Federal Open Market Committee
This committee sets the guidelines for monetary policy and the announcement of the interest rate, which is done 8 times a year. The members of the committee are 12, including 7 members of the Board of Governors; the president of the New York branch of the Federal Reserve, and the other four seats are distributed among the presidents of the other 11 branches, which rotate them for a year.
The Federal Reserve’s base interest rate
This is the most important interest rate and the main tool for achieving the goals set in monetary policy. The Federal Reserve announces changes in the base rate when it wants to give clear signals to its policy, and this has a major effect on all stock, bond and foreign exchange markets.
The interest rate at which the Federal Reserve lends short-term loans to commercial banks to maintain their liquidity. This interest rate is rather symbolic, but if it changes, it gives clear signals for policy changes led by the Fed. The discount rate is always lower than the basic interest rate. when the ratio between reserves and loans from commercial banks is exceeded. Although it has a rather symbolic function, its changes give clear signals for policy. It is almost always lower than the interest rate on federal funds.
30-year Treasury Bond – A thirty-year Treasury bond
Also known as a long bond. This is one of the most important indicators of market expectations for inflation. There is no direct relationship between a debt bond and the US dollar, but a change in its price affects it. For example, the depreciation of a Treasury bond due to inflation concerns will put pressure on the dollar. These concerns may stem from strong economic data, and in turn, depending on the stage of the economic cycle, will have different effects. In an environment where inflation is not a threat, strong economic data will trigger a rise in the dollar, but otherwise (higher interest rates) they will have a negative effect on it due to the intensive sale of treasury bonds. Because treasury bonds are a major asset , they are affected by changes in capital flows that are subject to global causes. Financial or political difficulties in emerging markets can be a significant backbone for US Treasury bonds because of the security they offer, thereby positively impacting the US dollar.
3-month Eurodollar Deposits – Quarterly Eurodollar Deposits
The interest accrued on quarterly dollar deposits with banks outside the United States serves to calculate exchange rates. For example, with USD / JPY, the larger the interest rate differential in favor of a Euro dollar deposit versus a Euro yen deposit, the more likely the USD / JPY ratio to rise / rise in price /. Sometimes this rule is violated by other factors. 10-month Treasury Bond
Ten-year Treasury Bond – currency markets take into account the ten-year Treasury bond when comparing its price with similar foreign securities, namely Germany, Japan and England. The difference between the values of US ten-year bonds and those of other countries affects the exchange rate. If the US is more expensive, it will support the dollar and vice versa.
Treasury – US Treasury (meets Treasury Department in most countries)
It deals with managing domestic demand, balance of payments, budget, government revenue and the issuance and redemption of government securities. The Treasury cannot directly determine monetary policy, but the statements of / Paul O’Neill, Kenneth Dam and John Taylor / this dollar institution have a great influence on its movement.
The following are the most important indicators of the US economy: Employment report (including unemployment rate, average hourly earnings per hour and full-time employment data), Consumer Price Index (CPI), Production Price Index (PPI), Gross Domestic Product (GDP), International Trade, Labor Cost (ECI), ISM Survey, Productivity, Industrial Production, Initial Housing, Building Permits and Consumer Confidence. Stock Market – The three major indices are the Dow Jones Industrial Index (Dow), the S&P 500 and the NASDAQ.
The Dow has the biggest impact on the dollar. Since the mid-1990s, when foreign investors began to buy US securities, it has seen an increasing positive correlation with the US currency. Three major factors affect the Dow and the dollars respectively: 1) Corporate profits / revenue, projected and actual; 2) Expectations of a change in the base rate 3) Global reasons.
Impact of the Cross Course
The value of the dollar is sometimes also affected by the ratio (exchange rate) between the other two currencies, which may not include the US currency. Take the following example: A sharp rise in the yen against the euro may cause a general decline in the euro, including the EUR / USD pair, which will result in a stronger dollar.
Federal Funds Futures Contracts
Interest rate expectations may also relate to interest rates on federal futures funds. The value of the contract indicates what the interest rate will be on federal funds in the future, depending on the maturity of the contract. The contract is therefore indicative of market expectations regarding Federal Reserve policy. The value is determined by subtracting the contract price from 100 and the result is compared to the interest rate on the federal funds on the cash / spot market.
Quarterly Euro futures contracts
While federal funds futures contracts reflect interest expectations on these funds, quarterly euro dollar futures show interest rates on quarterly euro dollar deposits. For example, the difference between the futures contracts for quarterly deposits in euro dollars and euro yen is an important variable in determining the expectations for the USD / JPY ratio.
Factors affecting the movement of the EUR
Eurozone – The Eurozone
The euro area consists of 27 Member States of the European Union: Germany, France, Italy, Spain, Netherlands, Belgium, Austria, Finland, Portugal, Luxembourg, Bulgaria, Poland, Romania, Slovakia, Slovenia, Hungary, Croatia, Czech Republic, Sweden, Malta, Denmark, Estonia, Ireland, Cyprus, Latvia, Lithuania and Greece. They determine the value of the euro by participating proportionately on the basis of their Gross Domestic Product.
ECB – European Central Bank.
The ECB defines and controls the monetary policy of the euro area. ECB decisions are taken by the Governing Council, consisting of the Executive Board and the Governors of the central banks of the Member States.
Governors of the Central Banks:
Germany: Jens Weidmann
France: Francois Villeroy de Galhau
Italy: Ignazio Visco
Objectives of the European Central Bank
The main objective of the ECB is to ensure price stability. In its decision-making, the ECB is influenced by two main factors:
- Price stability and price change perspectives / forecasts – Price stability is determined by the so-called HICP – Harmonized Index of Consumer Prices. When there is an index increase of no more than 2%, price movements are assumed to be stable. A number of other economic indicators are used to determine the future price level.
- Increase of money in circulation – M3. The ECB sets Member States a 4.5% annual increase in M3.
The Governing Council of the European Central Bank meets every two weeks on Thursday and then announces whether a decision has been taken to change the base rate. At every first meeting of the month, a press conference is held to explain what monetary policy will be and the overall economic situation.
Interest Rates – Basic interest rate
The main interest rate at which the European Central Bank defines and manages its funds and liquidity. The difference between the ECB-backed base rate and the Fed-set base rate directly affects EUR / USD.
3-month Eurodeposit (Euribor) – 3-month Eurodeposit
The currency of a country held in a foreign bank is called the Euro currency, for example, dollars held in a European bank are called Euro dollars. The interest rate on 3-month euro deposits held with banks outside the euro area serves to approximate the price of EUR / USD in case of any changes in the basic interest rate. For example, if the interest rate on 3-month euro deposits increases as opposed to 3-month euro dollar deposits, then naturally the EUR / USD increases and vice versa. Sometimes this pattern is not observed due to the influence of other factors.
10-Year Government Bonds
The difference in interest rates on 10-year US government bonds and those in the Eurozone is also used to calculate the EUR / USD cross price. German 10-year government bonds are used to compare US bonds. For example, the interest rate on German bonds is lower than the US interest rate, with an increase in the interest rate on the German bonds (or a decrease in the interest rate on the US ones), ie a decrease in the spread between the two interest rates will cause an increase for the EUR. Conversely, increasing the spread between the two interest rates (increasing the US or decreasing the German interest rate) will reduce the EUR. More often, the ratio between the two interest rates is graphically depicted as a trend, rather than calculated by their absolute magnitudes. The determination and change of interest rates is related to the general economic situation of the US and the Eurozone.
The most important economic news that could affect EUR / USD from the Eurozone are those from Germany. The data are determined by: GDP, Inflation, CPI and HCPI, Industrial Production, Unemployment, German IFO Index. Each Member State’s budget deficit is also taken into account. according to the Stabilization and Development Pact, each Member State’s budget deficit must be below 3% of Gross and Domestic Product.
Impact of other crosses
The movement of EUR / USD may be affected by the movement of individual currencies against a third, such as USD / JPY and EUR / JPY. For example, if very good economic data for Japan comes out, the EUR / USD will fall due to the fall of the euro against JPY in the cross EUR / JPY, while maintaining the dollar price against the yen in USD / JPY cross.
Like all crosses, the EUR / USD movement is susceptible to various political turmoil and geopolitical factors influenced by the policies of the governments of Germany, France and Italy. Financial and political instability in Russia could also badly affect the euro due to Germany’s significant investment in Russia.
Factors affecting the movement of JPY
MoF – Ministry of Finance
The MOF is Japan’s most important political and monetary institution. Its impact on the JPY movement is greater than that of the US, England or Germany Treasury. MoF officials often make statements about the economy that aim to influence the possible appreciation or depreciation of the yen.
BoJ / Bank of Japan / – Central Bank of Japan
In 1998, new laws were passed in Japan to allow the central bank to make monetary policy decisions independently of the government (MoF). Thus, full control over monetary policy is transferred to the central bank, and the MF sets the guidelines for monetary policy. BoJ’s manager is Haruhiko Kuroda.
Basic interest rate
The Central Bank of Japan defines market behavior in the medium term by changing the base rate and thus maintaining the liquidity of commercial banks. They maintain liquidity. Through it, the bank signals changes in its monetary policy that affect the currency, stock market.
Japanese Government Bonds (JGBs) – Japanese government bonds.
The Central Bank purchases ten and twenty annual government bonds each month to maintain the liquidity of the monetary system. Ten-year bond income serves as a key indicator for setting the long-term interest rate base. The difference between the yields on Japanese ten-year bonds and the same US bonds determines the USD / JPY exchange rate. As the yields of JGBs increase, that is, interest rates on US bonds rise, leading to a rise in JPY against the USD.
Economic and Fiscal Policy Agency / Former EPA (Economic Planing Agency)
It formally takes over the functions of the influential Economic Planning Agency since January 6, 2001. It is a government agency that defines economic programs that address the trends and problems of employment, international trade and monetary policy.
MITI – Ministry of International Trade and Industry
Governmental institution that protects the interests of the Japanese industry and the competitiveness of Japanese corporations in international markets. This ministry lost much of its importance in the 1980s and 1990s, when US-Japan trade was the most attractive and decisive for the FOREX market.
Economic data / indicators
There are several economic news in the Japanese markets that have a big impact on it: GDP, Tankan survey (quarterly business climate and expectations survey), international trade, unemployment, industrial production and the amount of money in circulation (M2 + CDs) ).
Japan’s main stock index. The decline in the yen usually increases the shares of exporting companies, which causes the index to increase. The link between Nikkei and the yen can be straightforward – opening the market at high index values raises the yen (USD / JPY) as investors focus on equities in that currency. Impact of the Cross Course
The USD / JPY exchange rate is affected by the EUR / JPY and EUR / USD ratios.
For example, an increase in USD / JPY (appreciating dollar and depreciating yen) could be the result of an increase in EUR / JPY (instead of a strong dollar). The appreciation in the cross rate may also be due to the opposite sentiment in Japan and the Eurozone. Another example: EUR / JPY and EUR / USD are rising due to the strengthening of the euro. In certain cases (better prospects in Japan), this has a stronger impact on the dollar than on the yen (due to the commitment of the two economies). As a result, the USD / JPY ratio weakens as the yen is less affected by the appreciation of the euro.
Factors affecting the movement of GBP
Bank of England / BoE / – Central Bank of England
The central bank is an independent body that determines monetary policy. BoE provides price stability and acts in support of the government to achieve economic growth. The government sets an inflation ceiling / RPIX / 2.5% and BoE subscribes to prices within that range.
MPC – Monetary Polici Committee
This committee decides on interest rates and changes in monetary policy.
Basic interest rate
A change in the base rate is an important signal for a change in the guideline and directly affects the GBP.
Gilts – Government bonds
Also known as gilded securities, i.e. reliable. The yield gap between British and US ten-year government bonds affects GBP / USD. Increasing the interest rate on government bonds against US leads to a rise in GBP and a weakening of the USD, the same is their dependence on German bonds.
3 – month Eurosterling Deposits – Quarterly deposits in Euro sterling
This is the interest rate on quarterly sterling deposits with banks outside the United Kingdom. It serves as a basis for determining the differences between basic interest rates and for calculating exchange rates. One theoretical example of the GBP / USD ratio: the greater the difference between interest rates on euro dollar deposits and those on euro sterling, the more likely the fall in GBP / USD. Sometimes this rule is violated by other factors.
Treasury – Treasury (meets Treasury in most countries)
The Treasury’s role in determining monetary policy has been significantly diminished since the adoption of the Central Bank of England Act of June 1997, when the BoE was empowered to determine the monetary plate. Min. of Finance sets the annual inflation ceiling that the Central Bank must observe.
GBP and membership of the European Monetary Union / EMU /
The United Kingdom did not seek to adopt the euro as its official currency during its membership of the European Union (EU) and secured the abandonment of the euro through the Maastricht Treaty in 1992.
Opinion polls in the UK show that most Britons are against the euro, and in a referendum in June 2016, the UK voted to leave the EU, eliminating the chance of future adoption. On 31 January 2020 at 23:00 GMT, the United Kingdom left the EU.
The most important economic data for the United Kingdom affecting the GBP are: unemployment rate, average incomes, RPI-X, retail sales, PPI, industrial production, GDP growth, studies (in manufacturing and services) , the amount of cash in circulation (M4), the balance of payments and housing prices.
Quarterly futures contracts in Euro sterling (short sterling)
They reflect market expectations according to the price of the quarterly futures contracts in Euro sterling. The difference between Eurodollar and Euro sterling futures contracts affects the determination of expectations against GBP / USD.
FTSE-100 The UK’s leading stock index.
Unlike the US or Japan, this index has a relatively smaller impact on currency. Nevertheless, the true proportionality between the FTSE-100 and the Dow Jones Industrial Index is one of the strongest in the world markets.
Impact of the Cross Course
The GBP / USD ratio is sometimes affected by cross-currency (non-dollar) movements, such as EUR / GBP. One example: the rise in EUR / GBP (sterling decline) caused by expectations of the UK joining the euro could lead to a fall in GBP / USD. As well as the opposite – reports suggesting that the UK will not join the single European currency will hurt EUR / GBP.
Factors affecting the movement of CHF
SNB – Swiss National Bank
The Swiss Central Bank has maximum freedom to determine the monetary policy and guidelines of the CHF exchange rate. In order to maintain the liquidity and stability of the exchange rate, the Bank makes direct market interventions by including itself as a buyer or seller of Swiss franc dollars. SNB managers’ statements also have a direct impact on the CHF movement.
Basic interest rate
The Swiss Central Bank uses a discount rate. In the event of a change in monetary policy, SNB changes its interest rate and this directly affects the Swiss Franc. 3-month Euroswissfranc Deposits – Quarterly deposits in Euros
The interest rate on Swiss franc deposits held with banks outside Switzerland serves as a basis for determining interest rate differentials and calculates the value of the exchange rate on one basis. One theoretical example of the USD / CHF ratio: the greater the difference between interest rates in favor of Euro dollar deposits against those in Euros, the more likely the increase in USD / CHF. Sometimes this rule is violated by other factors.
The Swiss franc as a rescue haven
CHF has been a ‘haven’ for many years, thanks to the fact that: SNB has complete independence while maintaining monetary stability, banking system discretion and Switzerland’s neutral political position. In addition, the bank’s relatively large gold reserve has also contributed to the stability of the currency. Even with the weaker role of the franc after the mid-1990s (due to the appreciation of the dollar and the depreciation of gold), the Swiss currency remains a valuable alternative to the Forex markets.
The most important economic data for Switzerland are: M3 (the most comprehensive measure of the amount of money in circulation), CPI, unemployment rate, balance of payments, GDP and industrial production.
Impact of the Cross Course
The USD / CHF ratio is sometimes affected by cross-currency (non-dollar) movements, such as EUR / CHF or GBP / CHF. Example: An increase in the GBP / CHF caused by a rise in the UK base rate could cause the franc to depreciate against other currencies, including the dollar.
3-month Euroswiss Futures Contracts – Quarterly Euroswiss Futures Contracts
This contract reflects market expectations for quarterly deposits in euro / Swiss francs. The difference between Eurodollar and Euro / Swiss franc futures contracts is the main variable for setting expectations against USD / CHF.
Due to the proximity of the Swiss economy to the Eurozone (especially to Germany), the Swiss franc shows a very positive ratio against the euro. This relationship is most evident in the extremely negative USD / CHF / EUR / USD ratio. For example: a sudden movement at EUR / USD (generated by a fundamental factor) is likely to cause an equally sharp movement at USD / CHF in the opposite direction. The relationship between these two currency pairs is one of the strongest in the currency markets.
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