Dear Client,

Warmly reminds you that the component stocks in the stock index spot generate dividends. When dividends are distributed, VT Markets will make dividends and deductions for the clients who hold the trading products after the close of the day before the ex-dividend date.

Indices dividends will not be paid/charged as an inclusion along with the swap component. It will be executed separately through a balance statement directly to your trading account, the comment for which will be in the following format “Div & Product Name & Net Volume ”.

Please note the specific adjustments as follows:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

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US stocks rebounded higher on Wednesday, regaining bullish momentum after swinging between gains and losses throughout the day amid the falling US Producer Price Index. The US annual PPI declines to 8.7% in August, which fell at a stronger pace than expected and showed that the supply chain headwinds are easing. The moderate figure has eased the jitters about the aggressive rate hike moves by the Federal Reserve in the next meeting, meanwhile providing some support to the equity markets. As for now, the Retail Sales due on Thursday and Friday’s Michigan Consumer Sentiment report will be the key focus as investors will look for clues on the strength of the economy and inflation expectations.

In the Eurozone, the weakness in Germany has spread toward other larger economies as the Industrial Production fell 2.3% MoM in July, which came weaker than expected and showed the deterioration in the bloc’s economy. An ECB 75 bps rate hike in October is expected by the money market.

The benchmarks, S&P 500 and Dow Jones Industrial Average both edged higher on Wednesday as the falling US dollar and emerging dip buyers both sent the S&P 500 into the green at the close. The S&P 500 was up 0.3% daily and the Dow Jones Industrial Average was little changed for the day. Six out of eleven sectors in the S&P 500 stayed in positive territory as the Energy and the Consumer Discretionary sectors are the best performing among all groups, rising 2.85% and 1.30%, respectively. The Nasdaq 100 meanwhile climbed the most with a 0.8% gain on Wednesday and the MSCI World index was down 0.3% for the day.

Main Pairs Movement
The US dollar edged lower on Wednesday, remaining under bearish pressure and retreated to a daily low below the 109.30 mark amid the slightly improving market mood. But the US dollar index has rebounded back in the US session as the expectations for a hawkish Federal Reserve outcome next week should limit the losses for the greenback. Wednesday’s inflation data indicated that the producer prices index (PPI) declined for a second straight month in August as gasoline prices fell further.

GBP/USD advanced higher on Wednesday with a 0.40% gain as the lower-than-expected UK Consumer Price Index (CPI) data has provided support to the cable. On the UK front, the lower CPI reading has come as a sigh of relief for the UK economy amid the severe pain of sky-rocketing energy bills. Meanwhile, EUR/USD also slightly recovered from yesterday’s losses and refreshed its daily high near the 1.002 level. The pair was up almost 0.15% for the day.

Gold was back under pressure with a 0.30% loss for the day after dropping to a daily low below the $1,694 mark during the late US session, as the US dollar attempted a comeback and exerted selling pressure on the safe-haven metal. Meanwhile, WTI Oil advanced higher with a 1.58% gain for the day and refreshed its daily top above the $90 mark.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD managed to stage a rebound throughout Wednesday’s trading. The Euro took advantage of the weaker Dollar and has found breathing around parity. Fundamentals for the Euro, however, remain unchanged. The EU continues to suffer from a weak economy and as winter nears, energy prices are beginning to add to the weight of the economy. Furthermore, as Russia continues to cut off natural gas supplies via Nordstream 1, European citizens are facing one of the most challenging winters. The weaker Dollar was caused by a surprise drop in the U.S. PPI, which declined 0.1% in August. While the weaker PPI indicates a possible slowdown in aggregate demand, the macroeconomics environment for the U.S. remains unchanged and prices are still rising in core sectors, thus a weaker PPI would not deter the hawkish Fed.

On the technical side, EURUSD has successfully defended our previous estimated support level of around 0.99. Short-term resistance for the pair stands at slightly above parity. RSI for the pair sits at 44.86, as of writing. On the four-hour chart, EURUSD currently trades above its 50-day SMA, but below its 100 and 200-day SMA.

Resistance:  0.9902, 1.0011, 1.0055

Support: 0.9902, 0.985

GBPUSD (4-Hour Chart)

Cable advanced throughout Wednesday’s trading. The U.K. CPI data indicated a decline to 9.9%, compared to 10.1% in July; however, the core CPI increased to 6.3%, compared to 6.2% in July. Similar to the U.S. CPI released on Tuesday, the British CPI continues to show that prices are not declining and the most important sectors continue to exhibit sticky and upwardly moving prices. The weaker U.S. PPI allowed the British Pound to find bidding and recover above the 1.15 price region. The BoE’s next interest rate decision is now forecasted to come in at 75 basis points. On the economic docket, the U.S. is scheduled to release its August retail sales figure during today’s American trading session.

On the technical side, GBPUSD has found support at slightly above our previously estimated support level of 1.1463. The short-term resistance level stands at around the 1.1714 price region. RSI for the pair sits at 48.07, as of writing. On the four-hour chart, GBPUSD currently trades above its 50-day SMA, but below its 100 and 200-day SMA.

Resistance: 1.1561, 1.1854

Support: 1.1463

XAUUSD (4-Hour Chart)

After tumbling more than 1.2% throughout Tuesday’s trading, Gold continued to lose ground on Wednesday. The non-yielding yellow metal has failed to attract bidding as market participants seek for yields from other asset classes. Despite the broadly weakened U.S. Greenback, Gold has continued to be disfavored. The CME FedWatch tool has now indicated a 36% probability of a full percentage interest rate hike by the Fed; however, the Fed would need compelling evidence from the economy to go ahead with such a large hike. The downside for the yellow metal remains uncapped as global central banks are geared for further tightening.

On the technical side, XAUUSD has found some bidding slightly above our previously estimated support level f $1695 per ounce. We remain confident that this level should hold for the near future. Resistance for Gold stands at $1724 per ounce. RSI for the pair sits at 39.64, as of writing. On the four-hour chart, XAUUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1740, 1800

Support: 1712, 1695

Economic Data

Whether you are learning to trade forex for the first time or you have already spent years honing your FX strategy, spreads are something you need to know about. These important data points give you insight into how much your positions will cost, as well as offering other indications of market conditions.

But this is only a very basic overview. So what is a forex spread exactly, and what does this mean for traders? How do you read and analyse the FX spread data you encounter? Here’s what you need to know.

Understanding forex spreads

What are spreads in forex trading? A spread in forex relates to a currency pair or currency correlation and is a representation of the difference between the buying and selling prices for this particular pair on the FX market. The buying price is sometimes known as the bid price, while the selling price is known as the ask price. Spreads are not unique to forex, and traders in other financial markets — including the equities market — will need to be aware of the spread value and what it means.

To calculate the FX or money spread, you need to subtract the price to sell the currency pair (the ask price) from the price to buy the currency pair (the bid price).

Let’s look at the USD/AUD currency pair as an example. If the bid price is 1.46268 and the ask price is 1.46262, the difference between the two is 0.00006. This is the spread.

Remember that the spread will be represented in the form of pips — for the USD/AUD pair, a pip is a movement at the fourth decimal place. This means the spread would be 0.6 pips.

Forex spreads and trading costs

The forex spread value serves an important function — it tells traders how much they will need to pay when they open a position on the FX market. This is why it’s important to understand how to calculate the spread cost in forex.

To make this calculation, you will need to know the size of the position you plan to open and the spread value in pips.

So, in the above example, the spread was 0.6 pips or $0.00006.

Let’s say you are trading a standard lot of the currency in question — this is 100,000 units.

0.00006 x 100,000 = 6

The cost to the trader is $6.

The greater the spread, the greater the cost to the trader when they open a position in the market. This is why traders generally look for narrower, lower-cost spreads before they decide to open positions.

Spreads and leverage

Using leverage in forex is a popular technique for traders who want to increase their exposure to market forces. Generally, traders only have enough available capital to open small positions in the market — positions with relatively low levels of exposure. This means their potential returns — and their potential losses — are limited. You will either have to achieve success in a large number of trades to make a significant return or keep your position open for a very long period of time. Neither strategy guarantees that the trader will make money.

To enhance and augment exposure to risk and volatility, traders often turn to leverage. When you use leverage, you are borrowing capital with which to open your position. So, if you leverage a position at a ratio of 20:1, you are borrowing $20 for every $1 from your own trading account balance. This increases the potential benefits of a forex trade, but also increases the risk to the trader themselves. Basically, in the above example, potential returns are multiplied by 20 — but remember, you’ll also need to pay this leveraged money back after the transaction, so tread carefully.

Unfortunately, the spread will also be magnified when you choose to leverage a position, along with the trading costs. In the above example, you’ll pay 20x more to open your position than you would without leverage. Again, this is a reason to approach leverage with a careful and research-backed approach.

Spreads and margin calls

In some cases, a change in the spread may result in a margin call. Movements and changes to the spread volume are common and can be caused by changes in volatility or liquidity, as well as a range of global economic and geopolitical factors. However, significant movements can also cause problems and may result in the position being closed and liquidated.

Margin calls occur when traders are no longer able to service their open positions.

This can happen for a number of reasons — leverage and excessive losses are behind most margin calls, as traders can quickly find themselves out of their depth on a position if the market moves in an unexpected direction. FX spread changes can also trigger these calls if the cost of keeping the position open exceeds the available funds in the account. You may add funds to your account to keep the position open, or you may decide that the spread has become too unfavourable to continue, and instead accept the liquidation.

Grow your understanding of spreads and start forex trading at VT Markets

Here at VT Markets, we are proud to offer one of the leading forex platforms on the market. We have a range of tools to help beginner traders and more experienced FX veterans alike as they open positions and make trades. Use our demo account to build your confidence and to discover more about important trading aspects like spreads. Even if you have traded on other platforms before, it’s worth using this demo account to become familiar with how VT Markets works. Next, you can start trading for real with a live trading account. Want to learn more about our platform or forex spreads? Get in touch with our team today.

FAQs

Do spreads matter in forex?

Yes, spreads do matter in FX, and anyone who learns to trade forex needs to know about spreads. The greater the spread, the greater the cost that traders will incur when they open a position on a certain currency pair. Traders will have to pay particular attention to the spreads on currency pairs they want to trade and will need to factor this into their strategy.

Are forex spreads the same as pips?

FX spreads are not the same as pips. Pips in forex are incremental measurements that help traders to understand which way the market is moving — representing a movement at the fourth decimal place of the currency value in most cases, or the second decimal place for currencies of smaller denominations.

But pips and spreads are linked. This is because pips are used to measure the size of the spread. The buying and selling prices of the two currencies in a pair will be measured in pips, and the difference between these values will tell you the spread.

Why are forex spreads so high?

Forex spreads vary greatly, and there are a number of factors that can cause them to widen beyond ordinary or expected levels.

Periods of low liquidity result in higher spreads — when exchanges close at the end of the trading week, spreads will become wider.

High volatility in the market will also result in high spreads, as trading platforms and brokers seek to mitigate some of the risk that comes from this sort of trading environment.

Spreads may increase ahead of a major economic or geopolitical news event that will impact exchange rates in forex. The spread will respond to market uncertainty.

High forex spreads may also be caused by a significant market shock, such as a financial crash somewhere in the world.

What does a high spread mean in forex?

A high spread means that there is a significant difference between the buying and selling values of a currency pair. If trades are made when spreads are high, the cost to the trader is greater — this is why traders generally look for lower spreads when they approach currency pair positions.

A high spread may also provide an indication of the condition of the market. Higher spreads often indicate that volatility is high and liquidity is low for a particular currency pair.

What is a good spread in forex?

It’s difficult to identify exactly what is a good forex trading spread, simply because different trading strategies have different requirements. Scalper trading, for example, may benefit from periods of high volatility and the rapid price movements that result from this. Generally speaking, though, traders want spreads to be as low as possible, indicating low volatility and high levels of liquidity. This is because the transaction cost will be lower.

Spreads vary across different currency pairs and through different market conditions. The average spread for the USD/CAD currency pair, for example, will be around 2.0, while the average for the EUR/JPY currency pair will be around 1.8. Anything below this level can be considered a good spread. Analysing the market via your trading platform will help you to understand more about good and bad spreads for specific markets.

Trading in the forex market generally involves speculating on the movements of currency pairs and predicting whether the market will move up or down. But as with any form of trading, there is more to it than this, and there are a number of different aspects you’ll need to be aware of as you approach the market. The FX margin is one of these aspects.

Understanding margins

What does the margin mean when trading forex?

The margin level in forex is a designated amount of funds that you will be required to keep in your account at any one time. If you do not have these funds available in your account, you will not be able to open positions in the market and you won’t be able to make trades. 

The exact amount of money you need to keep in your account will vary according to the broker you are working with. Some brokers will require that more money is kept in your account in order to guarantee open positions. In other words, they will have a high FX margin requirement, while others will require less. The broker will make this known in the form of a percentage, showing you how much balance you need to retain in relation to your open positions.

So, if the broker has a 5% margin requirement for forex trading, and you open a trade with $10,000, you’ll need to keep $500 in your account for the full active duration of the trade. If your balance falls below this level, trades can be closed and liquidated as a result. This means it is important to remain aware of pip movements. Pips in FX are incremental price movements, usually at the fourth decimal place of the currency pair value. The pip movement will tell you which way the market is travelling and will give you an indication of whether you are approaching your margin or not.

If you are trading without leverage, FX margins do not pose too much of a problem — a small percentage of a low-value trade is not too difficult to maintain. However, margins become more important when trading on leverage, as this enables traders to open positions of far greater value, pushing the margin requirement up. More on this below.

The margin trading technique

The FX margin is not just something that traders need to be aware of, but it’s also something they can use to their own advantage by trading on the margin — although this requires a very careful approach, and there are no guarantees of success.

Trading on the margin essentially means you cover the margin requirement percentage and the broker covers the rest. So, returning to the above example, you would have to put down $500 to meet the 5% margin requirement, and the broker would put down the remaining $9,500 to cover the full $10,000. From here, you will need to ensure that you have enough funds in your account to cover this margin at all times – essentially maintaining a $500 balance to control a $10,000 trade.

This can be attractive for traders working with currency pairs and currency correlations, as it enables greater exposure to market forces – and therefore greater potential benefits from forex trading – with only a relatively small investment of your own capital. However, this is a risky strategy and should be used with great caution. When you trade on the margin in this way, you are borrowing funds directly from the broker, and these funds will need to be paid back.

Let’s say you decided to open the margin trading position we’ve looked at above, putting down $500 to control a $10,000 trade. If this position falls to 92% of its original worth – $9,200 – you have lost your $500 margin and are also responsible for the loss of $300 of the broker’s money. This will result in a margin call. In other words, you will have to cover this loss and bring your balance back up to 5% of the initial position. In order to protect themselves and their funds, brokers will require that you meet this margin call and will simply liquidate the position if you do not meet this requirement.

So, while margin trading can help traders to increase their profits, it also significantly increases the risk they face during trading.

The margin call in more detail

A margin call can happen whether you are trading on the margin, trading on leverage, or even if you are only operating a standard trading position.

Basically, if you are trading on the margin or on leverage, the broker will need to guarantee the money they have lent to you. This means you will need to keep a certain level of capital in your account, according to the margin percentage requirement. Even if you have not borrowed any money from the brokerage to open the position, you will still need to cover any spread changes or maintenance costs associated with the trade, and so the margin level will still apply. If the available funds in your account fall below the margin level, a margin call will be issued.

When a margin call happens, you’ll need to make sure you have enough funds in your account to continue. You may decide to add more funds to cover the losses and restore the FX margin level. This may be a good idea if you feel that the losses are only temporary and your predictions indicate larger gains in the long term.

Alternatively, you can choose to close certain active positions to bring your account back into line with trading parameters. It is best to do this before a margin call is made, as the broker will automatically start closing positions if your funds drop below a certain level, and this can cause you to lose your invested capital.

Closing winning trades will increase your account balance and may help to avoid a margin call, while closing losing trades will limit your losses as you keep your account within the required parameters. Bear in mind you may still lose money or miss out on future trading successes from winning positions, but you will still be required to close these positions to avoid or to meet a margin call.

Stop loss tools are also useful here. A stop loss will automatically close your position once it falls below a certain level. Typically, these are used to prevent excessive losses and to help you to keep within your longer-term trading strategy. However, they are also very useful in avoiding margin calls. The exchange rate in forex can be volatile and may move up or down unexpectedly. With this in mind, an automated tool like stop loss provides you with valuable protection.

Managing available funds, open positions, and margin requirements is an important part of learning how to trade forex. Achieving success in this tricky balancing act is certainly not easy but is a necessary skill for traders seeking to become more experienced.

The difference between margin and leverage in forex trading

What is the difference between margin and leverage in forex trading? At first glance, the two concepts appear to be almost the same. Both involve borrowing additional funds that allow you to control a far larger position than your available funds would allow, and both require you to remain aware of the margin level at all times. However, trading on leverage in forex is fundamentally different from margin trading in the way it is represented.

Leverage trading is defined according to a ratio. For example, you may open a position with 25:1 leverage – this means for every $1 of your own money you put up for the trade, you are borrowing $25. To control a $10,000 position, you’d need to put up $400.

Margin trading is defined according to a percentage. This percentage shows you the amount of capital you will need to hold in your account if you are to keep your active positions open. So, a margin of 4% would be the same as trading a position with 25:1 leverage, as 100/25 = 4. You’d still need to put up the same $400 to control a position with $10,000 if you were trading with a margin of 4%.

You’ll still need to be aware of the margin requirement, whether you are margin trading or leverage trading. If the available funds fall below this amount, you’ll still need to modify this to avoid a margin call, no matter which approach you are using. Utilising a margin percentage can help you to keep this requirement in mind, and this can be useful for traders as they learn forex.

Start trading with VT Markets today

The VT Markets platform is one of the market leaders, with a range of tools for beginners and more experienced traders alike. Try our demo account to get started, then move on to real trades with the live trading account. Want to learn more about our platform or forex spreads?  Get in touch with our team today.

FAQs

How is the FX margin requirement calculated?

The FX margin requirement is calculated according to the amount of protection the broker or lender desires. Larger FX margins provide more protection, as the trader needs to keep a higher proportion of the active trade value in their account to service the position.

What is a 5% margin in forex?

A 5% margin in forex means you will need to keep 5% of the value of the active trade in your account at all times. If your account balance falls below this level, your broker may decide to liquidate the trade automatically.

How much margin do I need in forex?

Each broker can set their own margin requirements, so this will vary between trades. The margin will be expressed as a percentage. So, if you’re operating a $1,000 with a 5% margin, you’ll need to keep $50 in your trading account for as long as the position is open.

There are many different trading tools, advanced features, and derivative types available to traders in the FX market, but all of these require a firm grasp of currency pairs — also known as forex pairs. Discover more about this important aspect of trading below.

Understanding forex currency pairs

As you learn how to trade on the forex market, you will often find yourself dealing with currency pairs. As the name suggests, these pairs represent two global currencies that are analysed together, and traders will speculate on the relative price movements of each currency in the pair.

Pairs are represented with a base currency on the left and a quote currency on the right. The base is the currency being bought, while the quote is the currency being sold. In the USD/AUD currency pair, the United States Dollar is the base currency and the Australian Dollar is the quote currency.

Along with the currency pair demarcation, there will also be an exchange rate. This shows traders how much of the quote currency will be required to purchase one unit of the base currency. In the case of the USD/AUD forex pair, the exchange rate may be A$1.47 for every US$1. On the forex platform, however, this will be represented to a higher degree of accuracy — perhaps 1.4723. A movement at the fourth decimal place of this exchange rate is known as a pip in the FX market. For some quoted currencies, such as the Japanese Yen (which has a much smaller denomination than the Australian Dollar), a pip will be a movement at the second decimal place. Traders need to keep an eye on pips as they assess market performance.

Trading with currency pairs

Traders can open a long or short position on currency pairs. A long position is essentially a buying position — in the above example, they would be long on the United States Dollar and short on the Australian Dollar at the same time. If one United States Dollar is equal to 1.4723 Australian Dollars, the trader in this example is hoping that this value increases, delivering them a profit.

If traders believe that the market will move in the opposite direction, they can open a short position on the currency pair. This means going short on the United States Dollar and long on the Australian Dollar, and the trader will want the 1.4723 rate to decrease — i.e. they want the AUD to strengthen against the USD.

If traders believe that the market will move in the opposite direction, they can open a short position on the currency pair. This means going short on the United States Dollar and long on the Australian Dollar, and the trader will want the 1.4723 rate to decrease — i.e. they want the AUD to strengthen against the USD.

If traders believe that the market will move in the opposite direction, they can open a short position on the currency pair. This means going short on the United States Dollar and long on the Australian Dollar, and the trader will want the 1.4723 rate to decrease — i.e. they want the AUD to strengthen against the USD.

Bear in mind that there are no guarantees when it comes to trading FX pairs. You can certainly research your position and base your decision on data-backed predictions, but the market can still move in a different direction from the one you expected. In other words, there is always a risk of loss.

Different types of forex currency pairs

You have a huge amount of flexibility when it comes to trading. As discussed above, you can open long or short positions, but you can also choose a wide range of different currencies to trade with. A forex pair may comprise any two currencies from around the world, although some types of pairs are traded more frequently than others. In addition, FX pairs may be divided into general categories.

●       Major currency pairs

Major currency pairs are the forex pairs with the highest trading volume in terms of frequency and the amount of money used in transactions. Recently, the four major currency pairs are the EUR/USD, the USD/JPY, the GBP/USD, and the USD/CHF (Swiss Franc), although this is subject to change in accordance with market forces and general trading habits. The AUD/USD is another pair that has traditionally featured on the major list, and this may be included within broader definitions of the major forex pairs.

Trading with major forex pairs is a popular choice because they tend to provide a more stable option than other types of pairs, as well as tighter spreads and more liquidity. However, even with major forex pairs, there are no guarantees, and the market may move in an unexpected direction.

●       Minor currency pairs

Minor currency pairs are traded less frequently than the majors but still enjoy a relatively high level of volume compared to other choices (see the exotic pair section below). This category generally refers to any pairs outside of the top four, and which don’t involve the United States Dollar. Common examples include the EUR/JPY, the GBP/CHF, and the AUD/NZD (New Zealand Dollar).

Compared to major forex pairs, minors are more volatile — something that can make them attractive to traders looking to make potential returns quickly. However, the risk of significant losses is high, and liquidity tends to be low. The spreads also tend to be broader for minor pairs, increasing the cost of opening a position.

●       Exotic currency pairs

Exotic pairs are essentially minor pairs but with a very low trading volume, and so they are off the radar of most mainstream traders. It is more difficult to research these pairs, and liquidity is usually very low. Volatility may also be high, which means exotic options are best reserved for more experienced traders or those with specific knowledge of geopolitical and economic conditions.

The CAD/SGD (Canadian Dollar/Singapore Dollar) is a popular choice for exotic pair traders, as is the EUR/TRY (European Euro/Turkish Lira). Some exotics also include the United States Dollar, such as the USD/SEK (Swedish Krona) and the USD/THB (Thai Baht).

●       Currency cross pairs

Currency cross pairs simply refer to a group of minors that do not involve the United States Dollar, but which used to require the USD as an intermediary. Exchanging the British Pound for the Japanese Yen, for example, once required an exchange from GBP into USD, and then USD into JPY — so the GBP/JPY pair would be considered a currency cross.

Currency pairs and leverage or margins

Understanding margins and leverage is important for traders learning the forex market. A margin is the amount of money that a trader must hold in their account in order to open and maintain positions. Each broker will have their own leverage requirement — if the margin is set at 5%, your account balance must remain at or above 5% of the value of all your open trades. If it falls below this level, a margin call is issued and positions may be liquidated.

You can also trade on the margin. In the 5% example, you would need to cover 5% of the position’s value with your own capital, while the broker covers the remaining 95%. This increases the potential for profit, but also significantly raises the risk.

Trading on leverage in FX works in a similar way but is expressed as a ratio. For example, you may borrow $20 from the broker for every $1 you commit from your account balance — expressed as a leverage of 20:1. In this example, the margin is still 5%, and a margin call will be issued if your account balance falls below this level.

Both margins and leverage enable traders to maximise their exposure when they trade with a currency pair. In both instances listed above, you would be controlling a position 20x greater than if you had not used leverage or traded on the margin. This means you will need to assess the movement of the currency pair carefully and be ready to close the position if the pair’s exchange rate moves too far the wrong way. Stop-loss tools can also help you, automatically closing the position if the currency pair’s exchange rate falls below a certain threshold.

Currency pairs and spreads

When you look at the value of a forex pair on the VT Markets platform, you will notice that there is a difference between the buying and selling price for the pair. This difference is known as the spread. The spread enables brokerage platforms and brokers to remain profitable, driving revenue from each position opened.

What does this mean for currency pairs themselves? Well, narrower spreads translate to lower transaction costs for the trader, and also indicate higher liquidity and lower volatility. The major forex pairs all feature narrower spreads, which is one reason why so many traders opt for these high-volume pairs.

Trade with currency pairs at VT Markets

Here at VT Markets, we provide an industry-leading platform designed to help traders secure the benefits of forex in a sustainable and responsible way. There are always risks to this type of trading, but our tools and features help you to make considered choices and data-backed decisions as you grow your understanding. Get started with our demo account, and then open real positions with the live trading account. Want to learn more about our platform? Get in touch with our team today.

FAQs

What are the most frequently traded currency pairs?

The most frequently traded currency pairs are known as the major forex pairs. These include the EUR/USD, the USD/JPY, the GBP/USD, and the USD/CHF (Swiss Franc), but this list may change along with fluctuations in the market. The AUD/USD is another frequently traded pair.

What are forex currency correlations?

A currency correlation is a slightly more complex entity on the forex market. It refers to the relative movements of two currency pairs against one another. These pairs may move in the same direction, suggesting some kind of causal relationship (although this is not always the case), or they may move in opposite directions to one another. Alternatively, the pairs may display no relationship at all, moving together at some times and moving oppositely at others.

What is the best currency pair?

The major currency pairs tend to display the highest liquidity, the lowest trading costs and the lowest levels of volatility in the market. As you learn how to trade forex, you will grow your own strategy and understand more about which pairs are best for you, but pairs in this category offer generally favourable conditions for traders of all backgrounds.

In a general sense, correlation is something you’ll be looking for as you analyse and assess the forex market. While correlation does not always equal causation, it can still be useful in forecasting and predicting future market movements — techniques that will become increasingly important as you learn how to trade forex in a more advanced manner.

But, while correlations can be found in all forex data sets, currency correlations relate to something a bit more specific. So what are these currency pair correlations, and why do you need to know about them as a trader?

Understanding currency correlations and correlation trading in forex

When we discuss correlated forex pairs, we are basically talking about either three or four currencies arranged into two pairs. If one currency is shared between two pairs, there will be three currencies in total — and there will be four currencies if there is no such sharing. For example, if you are examining the AUD/USD and GBP/USD pairs, there are three currencies in total, but if you examine the AUD/USD and GBP/EUR pairs, there are four.

Forex correlation pairs are currency pairs that tend to exhibit movement patterns at the same time. If the movement of one pair appears to trigger the movement of another pair, there would be a correlation between the two.

But an FX correlation does not necessarily mean a move in the same direction. If an upwards or downwards movement of a certain pair appears to trigger the same in another pair, these pairs would have a positive correlation. If an upwards or downwards movement of a certain pair appears to trigger the opposite movement in another pair, these pairs would have a negative correlation.

This idea of “appearing to trigger” is important. Just because sets of currency pairs display a correlation does not mean they will always move in the expected direction. Nor does it mean that they will necessarily move to the same degree or with the same magnitude. There is always an element of uncertainty when it comes to trading on the forex market.

However, correlations do provide useful signals that traders can utilise as they make predictions and forecast future movements. With a careful, considered and conservative approach, you can start to grow your understanding and learn more about forex correlations and how they work.

Examples of positive and negative correlations

We’ve touched on positive and negative correlations above, but which currency pairs fall into these categories? Take a look at a few examples.

Positively correlating FX pairs

Positive forex correlation pairs are not all equal. Some will tend to correlate more closely, replicating each other’s movements almost exactly in some cases. Others will move only slightly in the same direction, but will show a repeated correlation over time.

Some of the most correlated pairs include:

• The AUD/USD pair against the NZD/USD pair.
• The EUR/USD pair against the GBP/USD pair.
• The EUR/USD pair against the USD/CHF (Swiss Franc) pair.
• The GBP/USD pair against the USD/CAD (Canadian Dollar) pair.
• The GBP/USD pair against the USD/CHF pair.

Bear in mind that these pairs may not necessarily correlate at all times, and that strong correlations between other pairs may emerge over time.

Negatively correlating FX pairs

Just like with positive currency correlations, negative correlations are also far from equal. There will be some negatively correlating pairs that more closely match the magnitude of each other’s movements, while others may move only slightly. Identifying and understanding these negative correlations is an important part of forex trading.

Some examples of negatively correlating FX pairs include:

• The USD/CHF pair against the EUR/USD pair.
• The GBP/USD pair against the USD/CHF pair.
• The USD/CAD pair against the AUD/JPY pair.
• The USD/JPY pair against the AUD/USD pair.
• The GBP/USD pair against the USD/JPY pair.

Again, bear in mind that negatively correlated forex pairs do not provide guarantees into future market movements. You will need to take care when you trade, and remember that a loss is possible even if you expect a strong correlation.

Analysing currency correlations

When you look at a currency pair, you will be looking at value movements measured in pips. Pips in fx are the smallest price movements that will register on the FX market trading platform, generally at the fourth decimal place. So, if a value increases from 1.4323 to 1.4325, this is a movement of two pips.

Pips are certainly important in terms of currency correlations, as it is these price movements that allow analysts to identify correlations in the first place. However, the level of correlation between two pairs is not measured in pips, but is instead represented as a coefficient. Most traders will use these coefficients to choose correlations, although they may also want to look at the pip movements of each pair.

The coefficient will be a value between -1 and 1. A negative value suggests a negative correlation, while a positive value suggests a positive correlation. A value of exactly -1 or exactly 1 means this correlation will happen 100% of the time — in realistic trading terms, you are not likely to see either of these numbers.

Instead, you’re likely to see a coefficient like -0.75 or 0.69 — a decimal representation of a number less than 1. The closer this decimal is to -1 or 1, the stronger the correlation trend. So, a coefficient of 0.91 demonstrates a stronger positive correlation than 0.72, and a coefficient of -0.89 suggests a stronger negative correlation than -0.61.

Trading with currency correlations

When you trade on the forex market, you are likely to use currency correlations in one of two ways.

●       Gathering evidence for forecasting

You may notice a trading signal or indicator that suggests a specific price movement for a currency pair. While these signals and indicators are useful when deciding on a trading strategy, it’s not unusual for traders to want to gather more information before they make a decision one way or another.

Looking at forex pairs that correlate with one another can provide this additional insight. For instance, you may predict that a pair is going to move in a specific direction, and you identify a history or correlation with another pair. A movement in this second pair will provide supporting evidence that suggests your prediction was correct, and you may decide to open a position as a result. You may also decide to increase your exposure to market forces by trading on the margin or by leveraging your forex position — just remember that this also raises the risk level for the trade. There are no guarantees of success, but this is an example of a considered strategy used by experienced traders.

●       Hedging other trades

Correlating forex pairs are also used in hedging strategies, where FX traders seek to mitigate the risk of one position by opening another. Understanding the correlations between different pairs is useful here, as traders can recoup some of their potential losses with a trade in the opposite direction.

The most obvious way to do this is to use negatively correlating forex pairs. You may open a position — either buying (long) or selling (short) on one currency pair, and then open the same position on a negatively correlating pair. If your first position fails, you will still make a return on the second position, provided that the correlation occurs as expected.

However, you can also hedge with two positively correlated pairs. To do this, you would open a position on the first pair — either a long or a short position — and then open the opposite position on the second pair. Again, if the first position fails, you would still make some return from the second position if the correlation is realised, mitigating your losses to some extent.

When you trade with currency pairs, you need to be aware of spreads. The spread is the difference between the buying and selling prices for a pair, and this essentially represents the fee you will need to pay to open a position. With hedging on currency correlations, you will be opening two positions rather than one, which means you’ll need to pay two sets of trading fees. This makes it doubly important to keep spreads in mind.

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FAQs

Which forex pairs are most correlated?

One way that traders try to realise the benefits of forex is by looking at correlations, but some correlations are stronger than others.

The AUD/USD and the NZD/USD, and the EUR/USD and the GBP/USD are two of the strongest positive correlations. Meanwhile, the USD/CHF (Swiss Franc) and the EUR/USD, and the GBP/USD and the USD/CHF display two of the strongest negative correlations. However, remember that this is subject to change, and the correlation is never guaranteed.

Which currency pairs work together?

To find the currency pairs that work best together, look at the exchange rate coefficient. This coefficient will be a number between -1 and 1. A coefficient of close to 1 represents a strong positive correlation, while a coefficient of close to -1 represents a strong negative correlation.

How is the currency correlation coefficient calculated?

It requires a complex calculation to arrive at the currency correlation coefficient. This calculation takes into account the mean value at closing for each pair over a specified time period. The mean closing value for Pair 1 is represented in the formula as X, while the mean closing value for Pair 2 is Y.

Using these values, the coefficient = ∑(X− X)(Y− Y) / √(X− X)² √(Y−Y)²

Most traders will use online tools built into the forex platform as they analyse coefficients, so they do not need to do this calculation themselves.

Exchange rates underpin the entire forex market, and you’ll need to know how to view, read and understand these rates as you develop your trading skills. Learn more in our guide.

Understanding exchange rates in forex

What is the exchange rate? The exchange rate in forex indicates how much of one currency is required to purchase a fixed amount — or one unit — of another. For example, it may require US$0.6 to purchase A$1, or it will require A$1.47 to purchase US$1. These values are subject to change.

Exchange rates are essentially the foundation of the forex — or foreign exchange — market. When you trade on this market, you will generally be working with a currency pair and speculating on the movement of the exchange rate between the currencies within this pair. One currency in the pair is the base currency — this is the ‘unit’ mentioned above. The other currency in the pair is the quote currency. The exchange rate is how much of the quote, or selling, currency is required to purchase one unit of the base, or buying, currency.

This is also important if you are trading with currency correlations. A currency correlation trade involves speculating of the relative movements of four currencies divided into two pairs. Understanding the exchange rate is critical for opening these more complex positions.

While the evolution of this exchange rate over time is what currency pair trading is based on, it is a factor in other trades too. Whether you are seeking to invest in a foreign market, or simply looking to make a currency trade ahead of an international trip, the exchange rate is something you’ll need to be aware of.

Reading the exchange rate

The exchange rate is measured in pips. Pips in forex refer to small movements of price, which will be at the fourth decimal place for most currency pairs, or at the second decimal place for pairs with quote currencies that have smaller denominations such as the Japanese yen. Observing these pip movements will help you to understand which direction the exchange rate is heading.

So how do you read this rate? It doesn’t matter what platform or service you use; the rate will be expressed in the same way — as a decimal value.

Let’s examine this by looking at the above example. In this case, we can make a currency pair of USD/AUD — the United States dollar is the base currency, and the AUD is the quote currency. This pair would be represented as USD/AUD 1.47 – which means 1.47 units of the AUD are required to purchase one unit of the USD, or A$1.47 per US$1.

Because the forex trading platform deals with a large number of different currencies from all over the world, the exchange rate will always be represented as a pair with the base and quote currencies both displayed. In other trading locations, such as at a physical exchange, you may only see a value for the quote currency. This is because it will be taken as given that the base currency is the local national currency.

How exchange rates are determined

How is currency valued? How are exchange rates determined? These rates are influenced by a wide array of different factors, which combine to make forex trading a complex but exciting endeavour.

Supply and demand is arguably the most obvious factor. If more people are buying a particular currency, and the market supply is not increasing in line with this, then the price of this currency will increase relative to others. If the opposite happens, or if supply outstrips demand for another reason, the price will fall.

Geopolitical factors will also play a major part. The United Kingdom’s exit from the European Union led to a significant fall in the relative value of the British pound, for example. However, it’s difficult to predict these market movements — economic sanctions against the Russian Federation led many to predict a decline for the Russian rouble, but this currency instead rallied against other major global currencies such as the United States dollar.

In this sense, exchange rates are not so much ‘determined’ as they are ‘dictated’ by market forces. There is no central committee overseeing the forex market, and rises and falls happen spontaneously. Even with careful research and forecasting, there are no guarantees in the market, and the exchange rate in FX may not move in the way you expected it to.

Fixed and floating exchange rates

To understand how exchange rates work, you need to recognise the difference between fixed and floating rates. As you learn how to trade forex and become more familiar with the market, you will notice that most currency pairs display a floating exchange rate. This means they are determined according to market forces. When supply and demand fluctuate, the rate of exchange in FX will fluctuate too.

Other currencies may not have a floating rate, but the rate will instead be fixed. This means the central bank of a particular country will peg the value of their own currency to that of another. The central bank achieves this by trading its own currency against its partner — usually the United States dollar but sometimes another form of currency.

The Saudi Arabian riyal is an example of this and will retain the same fixed rate against the United States dollar.

These currencies can still be used for speculation, as they are still subject to market forces. For instance, while the riyal will maintain the same value against the US dollar, it will fluctuate in relation to the European euro or the Japanese yen.

Exchange rates and spreads

Trading on the forex market is not free, and brokers and trading platforms need to secure revenue to keep themselves profitable. This is where forex spreads come into play.

When you view a currency pair and assess the exchange rate, you will notice that the price to buy and the price to sell the pair are not the same. There will be a disparity between the bid price (the buying price) and the ask price (the selling price), which is known as the spread.

Tighter spreads are more favourable for traders, as it reduces the cost associated with opening a position in the market. However, this spread may change over time in response to market forces, and this will have an impact on the cost of keeping each position open.

Exchange rates, leverage and margins

When you trade on the forex market, you will quickly encounter leverage and margins. Leverage in FX means borrowing money from the broker to supplement your own capital, and this will be expressed in a ratio. A position leveraged at 20:1, for instance, will involve borrowing $20 for every $1 of your own money you use to open the trade. Of course, this means the potential benefits of the forex trade increase significantly, but your potential losses increase too – this money will need to be paid back regardless of whether or not the trade is successful.

Margin trading works in a similar way, and you will still be borrowing money from the broker to supplement your own capital. However, the margin will be represented as a percentage. Opening a $1,000 position with a margin of 5% will require you to put up $50 of your own money, while the broker will make up the remaining $9,550. This is basically the same as using a 20:1 leverage to control a $1,000 trade. Again, the potential for profits increases, but so does the risk to the trader.

In both cases, you will incur a margin call if your available funds fall below the margin rate set by the broker. If this happens, you’ll need to close positions to bring your account back into line with requirements, or you’ll need to deposit funds directly. Failing to meet a margin call will result in positions being liquidated.

How does this relate to exchange rates? Well, it’s the movement of the exchange rate that drives the success of the trade. A movement of a few pips may not seem like much, but this can result in a significant rise or fall when leverage and margin trading is involved. If the exchange rate moves too far in an unexpected direction, a margin call may be issued. This means you need to take great care when working with these sorts of trades, implementing stop loss tools to provide additional protection.

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FAQs

What is the forex rate today?

Learning forex means learning to read and predict current and future fluctuations in foreign exchange rates. Trading platforms like the one provided by VT Markets will offer real-time forex data that gives you an exact picture of the currency rate.

Is forex the same as the exchange rate?

Forex stands for foreign exchange, so essentially forex and exchange rates are the same thing. The forex rate will not be exactly in line with the current exchange rate, due to the spreads that brokerage platforms use to generate revenue. However, these spreads will be small in most cases.

How does the exchange rate work in forex?

Exchange rates work according to market forces such as supply and demand. Increased supply that is not met by an equal increase in demand will result in a falling exchange rate. Increased demand without an increase in supply will result in a rising exchange rate. Geopolitical and social factors will also affect the rate of exchange.

US stocks plunged on Tuesday, coming under heavy selling pressure and suffered from their biggest daily losses in more than two years following the release of US Consumer Price Index data. The US annual CPI inflation decelerated to 8.3% yearly in August but was slightly above markets’ estimates of a decline to 8.1%. Therefore, the hotter-than-expected inflation data fueled the bets on a 75 bps rate hike by the Federal Reserve next week and weighed heavily on the equity markets. There is around a 25% chance that the Fed will announce a full 1.0% increase in the benchmark Fed rate on September 21 meeting.

In the Eurozone, the weaker-than-expected German ZEW Economic Sentiment declined to -61.9 in September and deteriorated the market mood. Furthermore, expectations that Russia will hit hard after retreating from some parts of Ukraine also undermined the euro. However, another 75 basis points rate hike from the European Central Bank in October is still on the table.

The benchmarks, S&P 500 and Dow Jones Industrial Average both suffered from heavy losses on Tuesday as a broad-based selloff pushed the equity market down most since 2020 amid the surging US dollar. The S&P 500 was down 4.3% daily and the Dow Jones Industrial Average also declined with a 3.9% loss for the day. All eleven sectors in S&P 500 stayed in negative territory as the Energy and the Utilities sectors are the worst performing among all groups, losing 5.64% and 5.35%, respectively. The Nasdaq 100 meanwhile dropped the most with a 5.5% loss on Tuesday and the MSCI World index was down 3.4% for the day.

Main Pairs Movement
The US dollar staged an impressive rally on Tuesday, regaining upside strength and witnessing its biggest one-day percentage gain since March 2020. The rising US treasury yields have provided strong support to the greenback as the stronger-than-expected US inflation data boosted investor bets that the Federal Reserve will need to stay aggressive in raising interest rates. As for today, the market focus shifts to the US Producer Price Index (PPI) report later in the US session.

GBP/USD retreated sharply on Tuesday with a 1.62% loss as the cable witnessed an intense sell-off towards the 1.150 mark after the release of the US CPI data. On the UK front, investors are awaiting the release of the UK inflation data which might add to the concerns of a recession and soaring jobless claims. Meanwhile, EUR/USD also plummeted and touched a daily low below the 0.9980 mark in the second half of the day. The pair was down almost 1.50% for the day.

Gold licked its wounds with a 1.28% loss for the day after retreating to a daily low around the $1,698 mark during the early US session, as the renewed fears of the Federal Reserve’s aggressive rate hike undermined the safe-haven metal. Meanwhile, WTI Oil remained under pressure and refreshed its daily low near the $85 mark during the US trading session as the hawkish Fed expectations propelled the recession woes on Tuesday.

Technical Analysis

EUR/USD (4-Hour Chart)

EUR/USD started the day with upward momentum, but the pair could not hold on to gains as the U.S. CPI report was released during the early American trading session. U.S. CPI came in at 8.3%, higher than market expectations f 8.1%. The Dollar Index soared more than 1% following the release of the report. Market participants have piled on to the rhetoric of a 75 basis point interest rate hike by the Fed as inflation continues to run high in core areas. Most notably, food and rent went up for August, thus causing the core CPI to rise at an unexpected rate. The strong Dollar, accompanied by the rising U.S. 10-year treasury yield eroded all of the shared currency’s early gains and sent the pair into correction territory.

On the technical side, EUR/USD reversed course slightly below our previously estimated resistance level of 1.0192 and is trending below parity. The short-term support level for the pair remains at 0.9902, however, a strong PPI report from the U.S. could send the Euro-Dollar pair further away from parity. RSI for the pair sits at 44.08, as of writing. On the four-hour chart, EUR/USD currently trades below its 50, 100, and 200-day SMA.

Resistance:  0.9902, 1.0011, 1.0055

Support: 0.9902, 0.985

GBP/USD (4-Hour Chart)

The British Pound attracted bidding during the earlier part of Tuesday’s trading, but the Pound did not stand a chance against the U.S. Greenback as the Dollar was met with a surge of demand following the hotter-than-expected CPI report. Cable reversed course around the 1.173 price region and began trending down as U.S. 10-year treasury yields soared past 3.4%. The British Pound, however, fared better compared to its European peers as the U.K. has yet to announce its monthly CPI figure. The downside for the British Pound could still be unrestricted as the nation faces one of its toughest seasons as winter approaches, and energy prices continue to haunt the residents of Britain. Furthermore, the BoE continues to be hampered by the weak British economy, so raising interest rates could add more pressure on any economic revival.

On the technical side, GBP/USD met fresh resistance at the 1.173 price region. We maintain 1.1463 as Cable’s short-term resistance as the upside for the U.S. Greenback is still yet to be exhausted. A hot CPI report from the U.K. could favour Pound bulls in the short term, but the stronger U.S. Greenback limits any upward momentum for Cable. RSI for the pair sits at 40.9, as of writing. On the four-hour chart, GBP/USD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1.1561, 1.1854

Support: 1.1463

XAU/USD (4-Hour Chart)

Gold prices advanced during early trading on the 13^th. Gold prices were able to rise before the U.S. CPI release as the Dollar continues to exert weakness; however, as the CPI came in above expectations, Gold plunged back to the $1,700 per ounce region. The non-yielding precious metal simply could not compete against U.S. treasury yields, which soared past 3.4% as market participants bet on a rise of short-term interest rates. The 75 basis point interest rate hike now seems all the more certain as core CPI from the U.S. rose unexpectedly. U.S. PPI, which is scheduled to release during today’s American trading session, is expected to show resilient demand and add to the case of a super-size interest rate hike as the next FOMC meeting nears.

On the technical side, XAU/USD has reversed course at our previously estimated resistance level of $1,724 per ounce and has broken below our previous estimated support level of $1,712  per ounce. The next level of support for Gold sits at the $1,695 per ounce price level. RSI for the pair sits at 41.4, as of writing. On the four-hour chart, XAU/USD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1740, 1800

Support: 1712, 1695

Economic Data

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US stocks advanced higher on Monday, preserving their bullish momentum and rose four straight days ahead of the key US consumer-price data. The speculations that inflation is near peaking have provided support to the equity markets, as the US CPI data is expected to show headline CPI cooled in August to an 8% a year pace. The falling US dollar also acted as a tailwind for the stock markets despite the firm anticipation that the Federal Reserve will hike interest rates by 75 basis points at its Sept. 20-21 meeting. The upside strength witnessed in equity markets could be linked to the market’s optimism and likely preparations for today’s inflation numbers.

In the Eurozone, the hawkish comments from the European Central Bank (ECB) policymakers and updates that Ukraine is gaining success in pushing back the Russian military from some of its areas have both underpinned the market’s cautious optimism. For today, the final readings of Germany’s August month Harmonized Index of Consumer Prices (HICP) will be crucial for immediate direction.

The benchmarks, S&P 500 and Dow Jones Industrial Average both preserved their bullish strength on Monday as the S&P 500 extended last week’s rally and notched the biggest gain over a four-day span since June. The S&P 500 was up 1.1% on a daily basis and the Dow Jones Industrial Average also advanced with a 0.7% gain for the day. All eleven sectors in S&P 500 stayed in positive territory as the Energy and the Information Technology sectors are the best performing among all groups, rising 1.81% and 1.63%, respectively. The Nasdaq 100 climbed the most with a 1.2% gain on Monday, and the MSCI World index was up 1.3% for the day.

Main Pairs Movement

The US dollar remained under pressure on Monday, extending its previous slide and fell to the lowest level in more than two weeks below the 108 mark amid the risk-on market environment. The news that Ukrainian forces have made significant progress in pushing back Russian troops has favoured investors’ sentiment and exerted bearish pressure on the safe-haven greenback. However, the losses could be limited as the policymakers from the US Federal Reserve and the European Central Bank (ECB) remain hawkish.

GBP/USD climbed higher on Monday with a 0.45% gain as the cable witnessed fresh buying and touched a daily high near the 1.1710 level amid the broad-based US dollar weakness. On the UK front, the recession worries were further fueled by the mostly disappointing UK macro data released earlier this Monday. Meanwhile, EUR/USD also edged higher and touched a daily high above the 1.018 mark in the early European session. The pair was up almost 0.20% for the day.

Gold preserved its upside strength with a 0.44% gain for the day after touching a daily high around the $1,734 mark during the US session, as the falling US dollar underpinned the safe-haven metal’s recovery. Meanwhile, WTI Oil extended its previous rally and refreshed its daily top near the $89 mark during the US trading session amid mixed concerns over the supply and demand of the black gold.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD rose for the second straight trading day as the shared currency continue to recover from its lowest level since the beginning of the year. The shared currency took advantage of the broad-based selling of the U.S. Greenback. Markets seem to have already priced in a supersized 75 basis point interest rate hike at the next FOMC policy meeting, which is set to happen on the 20th and 21st of September. The U.S. 10-year treasury yield also saw a decline during Monday’s trading as risk-on sentiment returns to equity markets. Market participants will now turn their attention to the U.S. CPI release, scheduled during today’s American trading session.

On the technical side, EURUSD has broken above our previously estimated resistance level of around 0.9902 and 1. We project the next level of resistance to sit around the 1.019 price region and the previous resistance level at 10055 would change in polarity and act as a near-term support level for the pair. RSI for the pair sits at 60, as of writing. On the four-hour chart, EURUSd currently trades above its 50, 100, and 200-day SMA.

Resistance:  0.9902, 1.0011, 1.0055

Support: 0.9902, 0.985

GBPUSD (4-Hour Chart)

Cable extended its winning streak into the new trading week as broad-based selling surrounded the U.S. Greenback. An upbeat market sentiment surrounding equities also allowed the British Sterling to find a demand that has seemingly gone away for months. The short-term reversal of Cable should be taken with caution, as the U.K.’s National Statistics revealed GDP growth below market estimates. A weak British economy combined with an ongoing energy crisis could further hinder any monetary tools that the BoE could utilize in order to reign in inflation. Market participants should note that the BoE has postponed its interest rate announcement by a week to September 22nd. A better-than-expected CPI figure from the U.S. could send Cable back into a correction trajectory.

On the technical side, GBPUSD has broken above our previously estimated resistance level of 1.1561 but is still trading below our secondary resistance level of 1.1854. The support level for GBPUSD continues to sit at 1.1463. RSI for the pair sits at 65.43, as of writing. On the four-hour chart, GBPUSD currently trades above its 50 and 100-day SMA, but below its 200-day SMA.

Resistance: 1.1561, 1.1854

Support: 1.1463

XAUUSD (4-Hour Chart)

Gold prices continue to recover for the second straight trading day as the Dollar index dives to a monthly low of below 109. As markets have now seemingly priced in the 75 basis point interest rate hike by the FOMC, the Dollar has entered a cycle of exhausted demand; however, with U.S. CPI scheduled to be released during the American trading session, the U.S. Dollar could be met with a fresh demand. Risk on sentiment across equity markets has made the case for a weaker Dollar and thus room for the yellow metal to gain back some lost ground. Market participants should be aware while Gold was able to gain more than 1% in the past two days, Gold prices have mainly depended on the weakness of the Dollar to rise; however, with inflation still acting as an economic headwind around the world, the non-yielding Gold provides little to no upside for longer-term investing horizons.

On the technical side, XAUUSD has broken above our previously estimated resistance level of $1,724 per ounce and is heading toward the next level of resistance at $1740 per ounce. A fresh short-term support level for Gold has formed around the $1712 per ounce price level. RSI for the pair sits at 59, as of writing. On the four-hour chart, XAUUSD currently trades above its 50-day SMA, but below its 100, and 200-day SMA.

Resistance: 1740, 1800

Support: 1712, 1695

Economic Data