Everyone knows that US dollar is the main currency of the world since it represents more than 50% of transactions in Foreign Exchange markets. EUR/USD, GBP/USD, USD/JPY and USD/CHF currency pairs are the most favorite among traders. In order to use these tools to advantage we should understand what are the key factors affecting the US dollar behavior. Let’s start from the beginning.
- Interest rate. Perhaps it is the main factor that determines the behavior of the buck. As a rule, the widest fluctuations in the currency market occur at the time of publication of this index.
There are three alternatives of the US dollar behavior at the moment when news about the interest rate comes out.
a. If the interest rate went up, it causes instant reaction in market – the US dollar exchange rate is growing.
b. If the interest rate went down – the US dollar falls.
c. If the interest rate remains unchanged, the further behavior of the US dollar depends on the sentiments announced in the market shortly before the news. If the majority expected the increase and the rate remained at the same level, the US dollar rate will probably fall. And vice versa.
Meetings devoted to the interest rate take place 6-8 times a year, with the market starts to pay attention to everything related to the upcoming event about 2 weeks before the news release.
- Unemployment. It is simple enough. If unemployment increases – the US dollar exchange rate should fall. And vice versa, if unemployment decreases – the rate goes up.
- The Treasury Bonds yield for 10-30 years period. In this case, we can see an instant dependence. This yields increase in profitability leads to the US dollar growth. And vice versa.
- The so-called FOMC “minutes” or meeting minutes of the Monetary Policy Central Bank. There is no technical dependency, but one should pay attention to the tone of the meeting. Here is an example: if the exchange rate was not increased, but the meeting was stormy with expecting the rate increase, it is likely that the US dollar rise in the short and medium term.
- Consumer Price Index – CPI or in other words the Inflation rate. This is a very important index, but the problem is that you can never know what to expect after its release. Most experts and brokers advise their clients leave the market shortly before the release of this indicator.
All these factors could shake the market before and after release, that, in turn, makes it possible to make good money.
For beginners, I would recommend to look at the history of quotations of the major currency pairs involving the US dollar at the time of the news release. It will help you to understand what the index/factor is most clear to you and to develop your own news trading strategy.
Except the so-called technical and fundamental factors, which we discussed above, the US dollar may be affected by the political news too. Among them are planned (for example, the Presidential, Congressional or Senate) and unpredictable (of 11 September). At this time it is better not to trade and wait for clarification of the situation.
As it was already described in the previous article “Everyone should know it”, the US economy has not any special secrets and pitfalls.
If the American political sky is cloudless, the Middle East is relatively quiet, and the North Korea leader was prescribed any antianxiety drugs – you should read the news, feel free to enter the market and make money.
May the force be with you!