Words like economic downturn or financial crisis often made headlines in recent years, especially after the Covid-19 pandemic, when many people’s incomes were lowered. During tough economic times, common people tend to face financial stress and job uncertainty, but making a living is still a necessity for them. Against this backdrop, if people can win a large jackpot at a relatively low cost, just like a lottery, that would undoubtedly provide temporary relief from financial difficulties and offer a glimmer of hope for a bright future.

Fortunately, the forex trading is just like this lottery, giving you a sense of hope and a chance to escape from financial worries. Of course, forex trading offers no guarantee that you can win high returns 100%. However, compared with lotteries which depend on pure luck, you may manage to win high profits by learning professional knowledge. Have an interest in joining forex trading? Let’s dive in.

What is Forex Trading?

Forex trading, also known as foreign exchange trading, refers to a game where you trade different countries’ currencies. In forex trading, you can purchase one currency and sell another one at the same time. For example, you might buy US dollars and sell euros, if you believe that the dollars will be more valuable compared to the euros in the future.

The goal of forex trading is to make a profit by taking advantage of changes in currency exchange rates. Exchange rates are the prices at which one currency can be exchanged for another. These rates can go up or down, just like the prices of your favorite Pokémon cards.

When participating in forex trading, you can use leverage, which is like borrowing money from a broker to make bigger trades. This may sound a bit complex for a beginner. Just imagine you are playing a video game, and you have a special power-up making your character stronger. Given the leverage is a key concept in forex trading, we will go through more details in the article “Understanding Margin and Leverage: Why Forex Trading May Boost Your Profits“. For now, you just need to keep this mind: Leverage can increase your potential profits, but it also increases the risk, so it’s important to use it wisely and understand the potential consequences.

To start your journey in forex trading, you’ll need to open an account with a forex broker, which is like having a platform to trade currencies. In such a platform, you will have access to the necessary tools, indicators and charts to help you make informed trading decisions. With Ultima Markets, you can not only trade currencies with our high leverage ratio, but also precious metals, commodities, indices, shares, and cryptos. In our multi-asset platform, you may win your own lottery by fully utilizing the price movements in various popular assets. Click here to register your account with Ultima Markets.

Why You Should not Miss the Opportunity of Forex Trading?

You may hear the news that someone got convicted for controlling one company’s share price. This kind of news is commonplace in the capital markets, as controlling one company’s share price requires relatively less money and power. But no single individual or entity has the power to fully control the forex market. The forex market is the largest and most liquid financial market in the world, with numerous participants, including central banks, commercial banks, hedge funds, corporations, and retail traders.

The forex market operates in a decentralized manner, meaning there is no central authority or governing body that dictates prices or controls the market as a whole. Instead, currency prices in the forex market are determined by the forces of supply and demand. In other words, if you master the professional trading knowledge, you may succeed in earning high returns without the need to worry that the price of assets you invest into may be distorted by some big market makers.

This gives common people a chance to win their lotteries as mentioned in the beginning of the article. The forex exchange rate resembles the password to decode the economic fluctuations, government policies, and investment decisions. In the forex market, the price of currencies are determined by the most professional traders in the world, resulting in a fair market.

Anyway, it’s important to remember that forex trading also involves risks, just like any game or investment. Prices can be influenced by many factors, such as economic news, political events, or even natural disasters. The forex trading is not a guaranteed approach to making money, but with knowledge, practice, and a responsible strategy, it can be an enticing and potentially profitable activity.

Summary

• Forex trading refers to a game where you trade different countries’ currencies.
• The goal of forex trading is to make a profit by taking advantage of changes in currency exchange rates.
• There is no central authority or governing body that dictates prices or controls the market as a whole.

You will never understand why forex trading may help you win the financial lotteries, if you have no idea about margin and leverage, the two key elements in forex trading.

What Are Leverage and Margin?

The terms, leverage and margin, are often used interchangeably in the forex trading, so let’s try to explain these two terms altogether.

Imagine you are playing a video game, and you have a special power-up that makes your character stronger. In forex trading, the leverage is exactly that power-up allowing you to control a bigger amount of capital with only a small amount of your own money. In simple terms, leverage is a multiple to magnify your money deposited into your trading account.

If leverage is a multiple of your deposit, then margin is the amount of money required to open a trading position. It is a small portion of the total value of the trade that you must have in your trading account. Margin serves as a form of collateral or security for the broker against potential losses.

Margin and leverage are important because it enables you to access the forex market with a smaller capital investment. In other words, you can engage in trade with limited funds and potentially profit from currency price movements.

How Leverage and Margin Work in Forex Trading?

Let’s say you want to trade $10,000 worth of a currency pair, but you only have $100 in your trading account. With leverage, your broker can lend you the remaining $9,900. In this case, the initial deposit of $100 is your margin, and your leverage ratio is 1:100 ($100/$10,000). Leverage allows you to amplify your potential profits. If the price of the currency pair goes in your favor, you can make a higher percentage return on your initial investment.

However, it’s key to remember that margin and leverage not only magnify your profit, but also amplify your losses if the trade fails to go as planned. If the price of the currency pair moves against you, you can lose more money than you initially invested. This is why it’s crucial to use leverage prudentially, and understand the potential risks involved.

Let’s continue with that video game analogy. If you use your special power-up correctly, then your character will be stronger, and you can defeat enemies easily and win more points. But if you use power-up in the wrong way, you may lose more points than if you don’t have the power-up. Similarly, if your forex trades don’t go well, you can lose more money with leverage than if you were trading with just your own funds.

Summary

• Leverage is a multiple to magnify the money deposited into your trading account.
• Margin is the amount of money required to open a trading position.
• You only have $100 in your trading account, but you want to trade $10,000 worth of a currency pair. With leverage, your broker can lend you the remaining $9,900. In this case, the initial deposit of $100 is your margin, and the leverage ratio is 1:100 ($100/$10,000).

Watch out for ECB Lagarde’s words

At last, the euro has shrugged off bad economic news and inflation has come under control. It might be the time for ECB to reconsider its tightening monetary policy . Investors will focus on whether the European Central Bank will pause interest rate hikes in September as expected.

(Inflation rates in the euro zone in the past year)

ECB’s Dilemma: To Hike or Not to Hike

The August PMI report due on Wed. is going to be in the spotlight. Forecasts show the manufacturing sector slumps further, and start to take a toll on services sector, endangering the euro zone economy.

With sluggish numbers, the ECB could take a break in September rate hike, however, the euro might receive a hit. Most economists believe the ECB will pause rate hikes in September but see room for an increase before the end of 2023 amid rising inflation.

Lagarde’s Utterances: A Market Barometer

Separately, at the Jackson Hole Global Central Bank Economic Symposium on Saturday, European Central Bank President Lagarde’s speech is going to be very important. Investors will look for clues from the review.

U.S. Economic Resilience

Based on data released in the past week, the US economy continued to maintain a strong momentum. Retail sales and manufacturing figures unexpectedly rose as residential numbers climbed. The strength of the U.S. dollar has caused the euro to remain in a downward trend.

(EUR/USD daily cycle, Ultima Markets MT4)

July 4th represents a turning point at present. If it is broken, the upward momentum will subside, leaving little hope for EUR/USD to stage a rebound.

Market Volatility: The Lagarde Effect

It is worth noting that the overall volatility of the euro against the US dollar has slowed down significantly. Both the overall volatility on the chart and the average level of the 200 -period ATR indicators are declining. As a result,  Lagarde’s speech is going to shift the market volatility.

Conclusion

In conclusion, as we navigate the complex web of economic variables, ECB President Lagarde’s words loom large on the horizon.

The ECB’s delicate balancing act and the resilient U.S. economy have set the stage for a captivating narrative in the world of finance.

For investors and market participants, astutely decoding the signals emanating from these developments will be essential in making informed decisions.

Disclaimer

Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.

With easing policy, Yen sets to depreciate

Japan announced the latest July core CPI annual rate excluding fresh foods rose 3.1% year-over-year, slightly down from 3.3% in the previous month.

The figure matched with the Bank of Japan’s expectation. The slowdown is linked to lower energy prices, especially data from the Tokyo region showing a slight deceleration in inflation.

(Japan’s inflation level in the past year)

A Cautious Approach by the Bank of Japan

The BOJ’s holding back on raising rates makes a sharp contrast to its peers. The Bank of Japan has taken steps to curb potential economic risks, including allowing long-term government bond yields to rise to 1%. However, the monetary policies have not prevented the yen from depreciation.

The USD/JPY Exchange Rate

The exchange rate of USD/JPY began to fall in the past two days but remained above the high of 145. Over time, Japan’s low rate could lead to capital outflows, putting downward pressure on the yen.

(USD/JPY daily cycle, Ultima Markets MT4)

External Factors at Play

The future of the yen is not solely determined by Japan’s economic policies. External factors, such as global crises or recessions, can play a crucial role in shaping the currency’s fate. A crisis or recession might deter further rate cuts, yet the strength of the U.S. economy reduces this possibility.

A Turning Point at 150

Although the Japanese government could intervene the yen’s depreciation, its long-term course might remain unchanged. 150 marks a turning point. If USD/JPY rises above it, the Bank of Japan is expected to step into the market.

The Ongoing Tug-of-War

In summary, Japan’s inflation levels and the state of the global economy continue to be key determinants in the yen’s value. Under the current circumstances, the Bank of Japan’s easing policy is likely to support the trend of yen depreciation.

However, it’s essential to remember that external factors can still bring about short-term changes in this delicate balance.

Disclaimer

Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.

Focus on AUD/JPY.

Fundamentally speaking, Japan’s inflation has not declined, which increases the probability of the Bank of Japan’s future tightening policy. After a long-term depreciation, the yen has space for a short-term rebound. AUD/JPY has less room for arbitrage than USD/JPY. With strong USD, please watch out for AUD/JPY bear.

Technically speaking, the AUD/JPY daily stochastic oscillator shows a dead cross, falling below the 50 median line.

(Golden daily cycle, Ultima Markets MT4)

The exchange rate began to decline after falling below the 65- day moving average. It is worth noting that before the short-term moving average crosses again, the market has a high probability of touching the 240 -day moving average and rising again.

(AUD/JPY in 1 -hour period, Ultima Markets MT4)

In 1-hour period, the bearish trend is obvious, and the exchange has fallen below the 2400 -period moving average. However, there is a certain probability that it will find support and rebound there. You may wait for short entry here.

(AUD/JPY in 1 -hour period, Ultima Markets MT4)

According to the pivot indicator in Ultima Markets MT4, the central price is 93.489,

Bullish above 93.489, the first target is 93.759, and the second target 94.272.

Bearish below 93.489, the first target is 92.987, and the second target is 92.706.

Disclaimer Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.

Is a US Recession in 2023 Likely?

Let’s turn the clock back to the end of last year. At that time, most investors and economists predicted that the US economy would inevitably suffer a recession in 2023 because of the environment of high interest rates.

But today, at the end of July, the Federal Reserve once again raised the federal funds rate by 25 basis points, lifting the target range of the rate to 5.25% to 5.5%, the highest level since 2001.

However, the US economy shows no sign of recession. As of writing, the US NASDAQ, S&P 500 and Dow Jones index went up 39.45%, 16.86% and 6.16% respectively so far this year.

So, will there still be a recession? If there is still the possibility of a recession, when will it happen?

The three major indexes of U. S. stocks are still rising so far this year.

Current situation: the market is still strong

Judging from the current market situation, the US Commerce Department announced on July 27th that GDP in the second quarter of this year grew 2.4% from a year earlier, up from 2% in the first quarter.

At the same time, the Ministry of Commerce said that compared with the first quarter of this year, the higher GDP growth rate in the second quarter reflected a rebound in private sector inventory investment and an increase in non-residential fixed investment. This seems to suggest that the US economy will not experience a hard landing any time soon.

Coincidentally, the US labor market has also shown resilience. The labor department announced on August 4th that the unemployment rate fell to 3.5% in July, down 0.1% from June and nearing a half-century low, while wages rose slightly, with the average hourly wage rising 0.4% in July from a year earlier. The current low unemployment rate also reflects a robust US economy.

Let’s take another look at the inflation data that the Fed is most concerned about. The US Bureau of Labor Statistics reported that the consumer price index (CPI) rose 3.2% in July from a year earlier, up slightly from 3% in June, reflecting rising food prices and still high housing costs.

But beyond that, the rest of the inflation-related data was mostly good news, especially the core CPI data, which excludes food and energy items, slowed further from a year earlier, from 4.8% in June to 4.7% in July. Although inflation has not been suppressed yet, the overall situation has improved significantly than before.

In short, there is a lot of data showing that market vitality is still strong, and it seems that the risk of recession is getting farther and farther away.

Looking back on history: the Truth behind high interest rates

Although the US economy is not showing obvious signs of recession at the moment, is this enough to indicate that recession fears are not enough to worry about? As the saying goes, there is nothing new under the sun. If we look back on history, it is not difficult to find that this may not be the time to rest easy.

In February 2008, it was only months before the collapse of 158-year-old Lehman Brothers. But Ben Bernanke, then chairman of the Federal Reserve, said that while the economic situation was not optimistic, he did not think the US economy would be at risk of recession. And at that time, there were not a few economists who supported this view.

When it comes to the financial crash that swept the global economy in 2008, this crisis actually did not appear at the peak of the high interest rate environment. Contrary to most people’s stereotype, the “Lehman moment” came after the Fed had cut interest rates sharply in a row.

In order to cool the apparently overheated housing market at that time, the Federal Reserve raised the federal funds rate to a high of 5.25% on June 29, 2006, and maintained it for more than a year.

It was not until September 18, 2007, that interest rates were cut by 50 basis points. By the time Lehman collapsed in September 2008, the federal funds rate had already fallen to 2%, entering a low-interest environment.

So, here comes the question, why is the recession still breaking out when interest rates have fallen and the pressure for high interest rates is gone? To answer this question, we need to quote an economic concept here: real interest rate.

The so-called real interest rate refers to the real interest rate level shown by the nominal interest rate after excluding the impact of inflation. If it is expressed in a mathematical formula, it is:

Real interest rate = Nominal interest rate – Inflation rate

Understanding the concept of real interest rates will be of great significance for us to analyze the truth behind high interest rates in the United States! Because corporate borrowing is a normal phenomenon in economic activity. Since borrowing is involved, interest rates are naturally an unavoidable topic. Only at favorable interest rates can the economy get a corresponding boost.

Let’s give a few simple examples here. It is a well-known fact that the inflation rate in the United States remained high last year. Let’s assume that at some point last year, inflation rate was as high as 8%, while the nominal interest rate in the United States was 4%. The high interest rate level of 4% seems to put a lot of pressure on corporate borrowing. However, once we introduce the concept of real interest rate, we will find that the interest rate level of 4% interest rate will not cause any pressure.

Because 4% (nominal interest rate) minus 8% (inflation rate), you get a real interest rate of -4%. At this time, the real interest rate is simply negative. In other words, although enterprises bear the cost of interest rates of 4%, due to the existence of 8% inflation, the prices of products or services produced by enterprises will naturally be pushed up by 8% by inflation.

As a result, enterprises can still make a profit of 4% just from borrowing. Therefore, as long as the real interest rate is negative, simply high nominal interest rates will not necessarily have a recession impact on the economy, because the cost of debt is negative. This is the reason why U. S. stocks still rise all the way in a high interest rate environment.

But let’s give another example. What if nominal interest rates go up all the way and inflation rate starts to fall? For example, suppose the nominal interest rate rises to 5%, while inflation falls to 3%. In this case, the real interest rate becomes +2%, and the previously negative cost of debt has been completely turned into a positive number. And this is what is happening to the US economy right now.

So, what kind of pressure will happen to the economy once real interest rates are negative? With regard to this question, we only need to look back at the past history and the answer is clear at a glance.

The trend of US inflation and the federal funds rate over the past 25 years.

The blue line: the US inflation rate; the black line: the federal funds rate (or the nominal interest rate).

By looking at the chart above, we can clearly see that in the past 25 years, there are two time periods when the nominal interest rate is higher than the inflation rate, or namely the real interest rate is positive. These two time periods correspond to the two red circles in the above chart.

These two periods roughly correspond to the dotcom crisis in the United States in 2000-01 and the global financial crisis in 2007-08. Thus, when the cost of debt is negative, economic activities tend to develop smoothly, and once the cost of debt is positive, crises often follow.

Outlook: the hidden danger of recession has not been eliminated

Bloomberg conducted a poll among economists last December when 70% of economists thought the US economy would suffer a recession within the next 12 months. But by July this year, that number had fallen to 58%.

Similar surveys are common in many mainstream financial institutions. Goldman Sachs, which thought there was no recession in the US economy as early as last year, further lowered the probability of a recession in the next 12 months to just 20% in July.

It seems that the risk of recession has once again been forgotten by economists. But through the above analysis of real interest rates and a review of history, we can see that the hidden dangers of the current recession have not been completely eliminated.

The trend of US inflation and the federal funds rate over the past year.

The blue line: the US inflation rate; the black line: the US federal funds rate (or the nominal interest rate).

The chart above reflects the trend of US inflation and the federal funds rate over the past year. The red circle in the picture reflects that real interest rates have reached a turning point from negative to positive at the end of last year and the beginning of this year.

Of course, the real interest rate can only be regarded as a temporary transition from negative to positive. But it is not clear whether this situation will last for a long time in the future. If the Fed adjusts its interest rate policy in time, or if inflation rises repeatedly, real interest rates are still likely to return to negative territory. In short, real interest rates already pose a potential danger to the possible risk of recession.

Just as real interest rates in the US showed signs of turning from negative to positive, in August, Fitch Ratings, one of the world’s three largest rating agencies, suddenly downgraded the US credit rating, downgrading its long-term rating from “AAA” to “AA+”. For the downgrade, Fitch said it was mainly due to several key drivers:

• 1.The level of governance in the United States has deteriorated:

Federal debt has remained high for years, and repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. All these show that the level of governance in the United States has deteriorated, and public confidence in the government’s financial management has also been undermined.

• 2.Rising government deficits:

Fitch expected the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Additionally, state and local governments were expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022.

Fitch also forecasted a government deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025.

• 3.General government debt to climb:

Fitch predicted that US general government debt as a share of GDP will continue to climb, reaching 118.4% in 2025. That is more than 2.5 times higher than the median of 39.3% for “AAA” and 44.7% for “AA” sovereign countries. Fitch’s long-term forecasts show that the debt-to-GDP ratio will rise further, which will increase the vulnerability of US finances to future economic shocks.

Summary

It is worth mentioning that the fattest brown bears usually exist in the autumn before hibernation, and when winter goes to spring, brown bears are instead the weakest.

It is as if before the recession, countries often had plenty of tools in their fiscal toolboxes, which needed to be consumed in order to deal with risks. If there is a day when there are few fiscal instruments left, leaving the Fed with no choice but to slash interest rates, a recession will then be inevitable.

Therefore, in the future, the market should no longer pay more attention to whether the Fed will continue to raise interest rates, but instead focus on what attitude or way the Fed will use to create the expectation of interest rate cuts in the future. This will deserve further attention from the market in the future.