Understanding forex swaps

What are swaps in forex? A swap in forex trading occurs when two parties opt to loan one another an amount of a specific currency. Party A will loan a designated amount of one currency to Party B, and Party B will loan an equivalent amount of a different currency back to Party A. Both parties will pay interest on the amount of currency they have received.

Each party will need to agree on an exchange rate. This is based on the current forex spot trading rate — i.e., the exchange rate at the present moment — but the final agreed amount is likely to be above this value, factoring in predicted changes throughout the trade.

The actual loan amount does not necessarily need to change hands during a forex swap. While an agreed principal amount will be used to derive the interest that needs to be paid on the loan, this principal amount may not need to be transferred between the two parties. 

Generally, if the principal is not transferred, the forex swap will be a ‘fixed for floating’ swap. This means the two parties will pay interest based on the currency’s actual interest rate. The interest rate can increase or decrease over time, affecting the amount the recipient of the currency needs to pay.

In other cases, however, the full principal amount will be exchanged, and interest will be paid on top of this. At the end of the swap agreement, the exchange of the principal will be reversed, and each party will have their initial currency value returned to them.

When the principal amount changes hands, this is usually executed as a ‘fixed rate’ swap. Interest rates are paid at the levels that apply at the beginning of the swap agreement. This rate does not change, and interest is paid at this consistent level for the entire exchange duration.

Forex swaps and leverage

Leverage in forex is something that traders need to be aware of, as it is a significant part of the market process. This concept involves borrowing additional funds via a brokerage platform, which are then used to supplement the trader’s capital reserves. 

Trading leverage is represented as a ratio. A leverage ratio of 20:1 means that the trader is borrowing $20 for every $1 of their own capital they use to open the position. This allows traders to control a position 20x the value their own capital would otherwise allow — translating to 20x the profits if the trade is successful. Movements in currency prices are measured in pips. A pip in FX is an incremental move at the fourth decimal place of the currency value or the second decimal place in the case of smaller denomination currencies such as the Japanese Yen. These single pip movements are minimal, so the trader does not stand to gain or lose much from each one — with leverage; however, these movements are magnified by the order of the leverage ratio.

The loan amount will need to be paid back — plus interest — regardless of whether or not the transaction is successful. This is why traders need to be very careful with leverage, as their losses can be significant.

Traders cannot use leverage when they carry out a forex swap. Leverage is used for other types of trading, usually when opening buying or selling positions on currency pairs in the hope of a profit. Instead, leverage relates to FX swaps in a different way. When traders use leverage, they expose themselves to the swap interest rate. This is because they are borrowing capital to supplement the trade, and this borrowed capital carries an interest rate, as mentioned above. Users pay interest on their leveraged trade in the same way swap traders pay interest on the capital they receive.

Differences between forex swaps and other forex derivatives

You can view an FX swap can as a forex derivative. This is because the value of the swap agreement is derived from underlying data taken from the foreign exchange market. There are several other types of derivatives that traders can choose from as they learn more about the forex market, and swaps are different to these derivative types in many ways.

• FX swaps and FX futures

An FX future is a contract to carry out a transaction at a predetermined time. For the duration of the contract, the exchange rate is locked in and cannot move up or down — similar to the way an interest rate may be locked in with regard to a fixed rate swap. However, the transaction is not executed at the beginning of the trade but is completed at the end of the contract period, making swaps and futures fundamentally different. 

• FX swaps and FX forwards

An FX forward contract is very similar to a future contract. Both involve locked-in exchange rates and set time periods. The difference between the two derivatives is that futures are standardised contracts sold over an exchange, while forwards are not standardised and sold over the counter (OTC) via a brokerage. This means you can customise the terms of a forward to meet specific needs. As the transaction is incomplete until the end of the contract period, forwards are also inherently different to swaps.

• FX swaps and FX options

FX options feature locked-in rates and predefined contract periods like forwards and futures. The transaction is not completed until the end of the contract period — a primary difference between FX swaps and options derivatives. Unlike forwards and futures, options do not carry an obligation to complete the transaction.

The benefits of forex swaps

What are the benefits of forex swaps? What do traders get out of completing this sort of transaction? Read on to discover more about the advantages of this type of foreign exchange transaction.

Access to foreign capital

In the most basic sense, a forex swap enables traders to access foreign capital they may need for business purposes. If a trader wants to invest in a foreign market, they may need to exchange their domestic currency resources to gain access to the capital they need. This means paying the associated fees, which can be high, particularly when a large amount of capital is exchanged.

With a forex swap, traders may be able to access the capital they require in a more manageable and cost-effective manner. This may provide a more effective platform for foreign investment and business dealings than other sorts of currency exchange. However, this requires a strategic approach, careful calculation, and accurate forecasting for the future of the forex market. Even with all these measures in place, there are no guarantees that the strategy will be successful.

Ability to borrow at a better interest rate

With a swap in the forex market, traders will pay an interest rate based on the currency they receive as part of the exchange. In the case of a fixed rate swap, this interest rate will be locked in for the duration of the exchange contract, while a fixed to floating rate will fluctuate along with the interest rates applied to the foreign currency. In some cases, this interest rate may be more attractive to the trader than those involved in their domestic currency.

With the fixed rate swap, there is no risk of the interest rate changing over time, and the calculation is more straightforward. With fixed to floating swaps, however, the calculation becomes more complex as the trader must carefully forecast and predict future changes in the foreign currency’s interest rate.

Speculation capabilities

Traders may use forex swaps to speculate on relative price movements between currencies. Once a quote currency value is agreed upon, this value is set in the terms of the contract. When the contract reaches maturity, the exchange is reversed. If the quote currency value has moved above the predetermined exchange rate, the party who put up the quote currency initially makes a profit. If the quote currency value has fallen below the predetermined exchange rate, they will make a loss.

A range of different choices

Traders have a wide range of choices when they approach a forex swap. There are over 180 currencies listed on the foreign exchange market, and any of these currencies can be offered up in a trade. While most currency pair trades are made on pairs involving the same major currencies — including the United States Dollar and the European Euro — swaps can be made with any listed currency, provided the parties can agree on a rate of exchange.

Enjoy swap-free accounts with VT MarketsThe swap-free account is one of the best features of trading with VT Markets! This means you can trade without any worry about frustratingly high swap fees and overnight charges. You can simply focus on doing what you do best – trading and accomplishing  achieving its rewards. Try it now by setting up a demo account, until you graduate to a full trading account.

Types of forex trading

There are several different types of forex trades to be aware of. As you grow your confidence in the market and learn the ropes of forex trading, you may wish to add more types of trading to your repertoire, starting simply and working up to more complex strategies.

• Spot trading

Forex spot trading means opening positions based on the current spot rate. This is the rate at which currencies are traded at that exact moment in the market. In some senses, this is the simplest form of trading as the spot rate can be easily read and understood.

• Forwards

In forex trading, forwards are agreements to execute a trade on a predetermined position at a designated future data. When traders use forwards, they are contractually obliged to fulfil the agreement and to complete the trade. They can lock in the currency pair price for the duration of the forwards contract.

• Options

Forex traders can take out options on currency positions. This means they have the opportunity to execute a trade on their chosen currency pair for the length of the option term. Similar to forwards but fundamentally different, options do not carry the obligation to complete the trade.

• Swaps

A forex swap is an agreement to trade one currency with an equivalent amount in 

another country. Unlike some other types of trading, swaps allow traders to speculate on price movements by taking ownership of the currency rather than simply wagering on future market performance.

• Futures

A futures contract is similar to a forwards contract — both lock in a price for buying and selling at a future date. However, futures are standardised contracts, while forwards can be customised to meet the trader’s needs.

Get started with forex trading at VT Markets

With VT Markets, you gain access to one of the leading forex platforms in the market, providing all the tools you need to begin — or to continue — your forex trading journey. Set up a demo account and build your confidence in the market, then graduate up to a full trading account. Want to learn more? Reach out to our team directly.

FAQs

What does forex (FX) trading mean?

What is forex trading, exactly? Forex trading simply means opening positions on the forex market — otherwise known as the foreign exchange market. It is this market that determines the relative worth of currencies around the world based on price movements against one another. For example, the United States Dollar — represented on forex as USD — may increase in value, but if the Australian Dollar (AUD) grows at the same pace, its relative exchange rate will be unchanged. On the other hand, if the AUD strengthens against the USD, it will take fewer US dollars to match an equivalent value of Australian dollars.

So, how to trade in forex? When individuals trade on the FX market, they are essentially speculating on these price movements. They are predicting which direction a certain currency pair will move and then wagering on this move. If the market moves in its predicted direction, the trader takes a profit. If it does not, they absorb the loss.

Is there a difference between forex trading and currency trading?

Forex trading and currency trading generally refer to the same thing. However, forex trading tends to be more specific, referring to any trades made across the foreign exchange network that bring together national currencies from all over the world. Individuals can trade currencies in other ways — for example, trading digital or cryptocurrencies across a different type of exchange. But in most cases, forex trading and currency trading are synonymous.

How can I make money from forex trading?

Forex traders can profit from the FX market if their predictions are correct. If the trader believes a currency pair will grow in value, they can open a buying position and make money from this trade if their predictions are correct. On the other hand, if the trader believes the value will fall, they can open a selling position and profit as a result.

It is possible to increase market exposure by using leverage in FX. This means traders can increase their potential profits but also increase the risk of the trade. A leverage strategy can result in significant losses, so traders should tread carefully in the market.

How can I get started trading FX?

The best way to get started with trading FX is always the safest, most conservative way. By adopting a careful and responsible approach from the outset, traders can grow their experience in the FX market and trade with confidence and knowledge. While there are no guarantees in forex trading, this does make it easier to build a successful trading strategy for the future.

Use a demo account to get started. This demo account allows you to use all of the trading features and dashboard screens you would use in the live market, but with none of the risk. You will make practice trades and opening and closing positions, but you won’t have to put any money down.

What costs and fees do you have to pay when currency trading?

There will be fees, charges and expenses associated with currency trading. You will usually have to pay a commission fee to the broker platform — i.e., a fee for helping you to find and open the position — but this may simply be built into the spread of the currency pair. At VT Markets, we aim to keep fees low, supporting a positive experience for traders.

Some platforms may charge other fees. For example, fees may be payable after a period of inactivity or charges applied to deposits and withdrawals. VT Markets does not charge these additional fees to users.

How much money is traded on the forex market daily?

A survey conducted in 2019 showed that $6.6 trillion is traded on the forex market every day on average. The survey is conducted every three years, which means another set of findings should be released in 2022. These figures put the forex market in first place worldwide — no other financial market rivals forex in terms of trade volume.

Is forex trading income taxable?

In Australia, forex trading is recognised as a legitimate source of income; indeed, many traders can earn a living from their forex trades — although this is not guaranteed, and even experienced traders encounter risk daily. With this in mind, the Australian Taxation Office applies taxation to forex revenue.

This tax also applies to non-residents in Australia. You will have to pay tax on any profits made while trading through an Australian broker or exchange, even if you are not a citizen or resident of the country.

What are gaps in forex trading?

You may hear talk of gaps in the FX market, but what are these forex trading gaps? A gap is a sharp price movement involving a forex pair, in which the pair moves significantly up or down from one price point to another, with no trading increments in between. Generally, forex price movements happen in pips — a pip in forex stands for “percentage in point” — so traders can see which way the market is moving. However, sudden changes in available economic data or in the global geo-political situation can cause a rapid movement, known as a gap.

Traders are most likely to encounter gaps after the weekend. This is because the exchange is closed over the weekend, so there is more time between trades for an external event. Despite this, gaps can still appear anytime over the trading week.

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Trading forex with VT Markets means trading with an award-winning brokerage you can trust. At VT Markets, you’re treated to tight spreads to help keep your trading costs low, without needing to worry about pesky requotes. These features, plus all the best tools and services, make VT Markets the perfect trading partner for you. Set up a demo account now to build your confidence in the market, then graduate to a full trading account.

British government announces its latest Prime Minister. Liz Truss from the Conservative Party has been elected as Boris Johnson leaves office. Prime Minister Liz Truss’ hawkish reputation soon provided an upward boost to GBP/USD.

Meanwhile, US stocks remained closed on Monday amid the Labor Day holiday in the US, causing the trading volumes to maintain at their lows and major pairs to stay within limited intraday ranges. Despite market moves being restricted due to the holiday, the escalating US-China tussles over the trade deal and Taiwan has weighed on market sentiment as the Biden Administration announced its intention to continue with the Trump-era tariffs for now. The market focus now shifts to the US ISM Services PMI for August and a higher-than-expected number could renew the hawkish Fed bets amid the looming recession fears and the escalating geopolitical tension. The extremely hawkish Federal Reserve (Fed) might lead to declining US economic activities, as the unavailability of cheap money has forced the corporate to postpone their expansion plans and decrease investment opportunities.

In the Eurozone, the region’s worsening energy crisis has exerted heavy bearish pressure on the euro and added to the fears of high inflation and monetary tightening. Russian gas provider Gazprom decided to shut down the Nord Stream 1 pipeline last Friday. However, the latest news on Monday reported that Moscow’s decision to cut energy to Europe would continue until Western nations lift sanctions imposed after the Ukraine invasion. Therefore, the halting of energy supplies has worsened the situation for the Eurozone.

Main Pairs Movement

The US dollar was little changed on Monday, failing to extend its upside traction amid a Federal holiday in the US. The DXY index witnessed some buying and climbed to a daily high above 110.2 level during the Asian trading session, but then retreated to the 109.8 area to surrender most of its daily gains. recover most of its daily losses. The expectations for aggressive rate hikes by the US Federal Reserve (Fed) might continue to act as a tailwind for the safe-haven greenback, as the greenback hit a 20-year high against a basket of peers at the start of the week.

GBP/USD advanced higher with a 0.38% gain on Monday as Liz Truss’s win warrants the political instability in the UK economy. Liz Truss has been elected as the next UK Prime Minister after fighting for the leadership of the Conservative Party for more than two months. The GBP/USD pair dropped to a daily low below the 1.145 mark in the late Asian session, but regained positive traction and climbed towards the 1.1520 area heading into the European session. Meanwhile, EUR/USD remained under bearish pressure and retreated to a two-decade low amid the escalating fears of the energy crisis. The pair was down almost 0.05% for the day.

Gold dropped with a 0.15% loss for the day after climbing to a daily top above the $1715 mark during the European session, as the escalating recession fears in Europe and the expectations of aggressive rate hikes by the Fed both undermined the precious metal. Meanwhile, WTI oil extended its intra-day rally and rose to the $90 area during the US session, as OPEC+ unexpectedly agreed to make a token oil supply cut for October.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD plunged at the start of the new trading week. The Euro-Dollar pair met strong selling pressure as global market sentiment soured. The Euro was weakened significantly against the Dollar as Russia’s Gazprom halted gas flows to Europe via Nordstream 1 as the oil conglomerate cited leakage issues with the pipeline. Further energy supply shocks within the European region will only pose more downside pressure on the shared currency. U.S. markets are closed on the 5^th due to Labor Day. U.S. ISM non-manufacturing PMI will be released during today’s American trading session.

On the technical side, EURUSD has found support around the 0.9902 price region. The Dollar parity remains a strong resistance for EURUSD. RSI for the pair sits at 42.72, as of writing. On the daily chart, EURUSD currently trades below its 50, 100, and 200-day SMA.

Resistance:  1.0033, 1.0055, 1.0082

Support: 0.9902

GBPUSD (4-Hour Chart)

GBPUSD saw a large trading volume as the British government announces its latest Prime Minister. Liz Truss from the Conservative Party has been elected as Boris Johnson leaves office. Prime Minister Liz Truss’ hawkish reputation soon provided an upward boost to Cable and allowed the pair to erase most of its intra-day losses. Cable touched its lowest level since March 2020 during the Asia trading session, but the pair bounced back to above 1.15 during the American trading session. It remains to be seen whether Prime Minister Truss will be able to pull Britain out of one of the worst inflationary environments Britain has seen in recent decades.

On the technical side, GBPUSD bounced back from its intraday low of 1.14511 but we do observe 1.1463 as the pair’s near-term support. Near-term resistance sits around the 1.1561 and 1.1854 price regions. RSI for the pair sits at 53.58, as of writing. On the daily chart, GBPUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1.1561, 1.1854

Support: 1.1463

XAUUSD (4-Hour Chart)

Gold enjoyed a modest gain during last Friday’s trading as the U.S. reported 315K nonfarm payrolls added in August. Despite the figure is lower than the previous month’s figure, August hiring still came in above consensus estimates. The narrative surrounding the FOMC’s next interest rate decision has been skewed towards a 75 basis point interest rate hike, thus the non-yielding gold will continue to struggle against the U.S. Greenback without volatility heightening news events.

On the technical side, XAUUSD has found short-term support around the $1695 per ounce price region but long-term support for the precious metal sits at a lower $1688.129 per ounce price region. RSI for XAUUSD sits at 37.53, as of writing. On the daily chart, XAUUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1762, 1800

Support: 1688.129, 1695

Economic Data

The US is scheduled to report its ISM Services PMI this week, with interest rates data from the Reserve Bank of Australia, Bank of Canada, and the European Central Bank also due. Investors also anticipate GDP and Employment condition data from Australia and Canada, respectively.

Image source: forexfactory.com 

RBA Rate Statement | 6 September 2022

The Reserve Bank of Australia (RBA) raised the cash rate by 50bps to 1.85% during its August meeting, following 50-bps hikes in July and June and 25bps in May. This brings the cash rate to a level not seen since April 2016.

According to the board, rate hikes over the past few months were necessary to bring inflation down and to create a more sustainable demand and supply, adding that it would be taking further tightening measures.

Analysts predict that RBA will raise its benchmark interest rate by another 50bps at this month’s board meeting.

US ISM Services PMI | 6 September 2022

ISM Services PMI increased more than expected in July of 2022, reaching 56.7, the highest level in three months. 

Analysts had predicted that the index would be at 54.8.

Australian Gross Domestic Product | 7 September 2022

According to the Australian Bureau of Statistics, the Australian economy expanded by 0.8% in the first quarter of 2022. This was the second consecutive quarter of growth, following a contraction in the third quarter because of the Delta outbreak. 

We expect economic activity to remain resilient during the second quarter, with additional 1.3% growth.

Bank of Canada Rate Statement | 7 September 2022 

The Bank of Canada (BoC) raised the target for its overnight rate by 1% to 2.5% on 13 July 2022, a move not seen since 1998, surprising market-watchers expecting a 75bps hike. The BoC further signalled that it would continue to hike interest rates in the coming meeting to curb rising inflation.

The BoC will likely raise its overnight rate by 25bps in September, taking its official cash rate to 2.75%.

ECB Press Conference and Interest Rate Decision | 8 September 2022 

The European Central Bank (ECB) increased its key interest rate by 50bps at its July 2022 meeting, the first increase since 2011. The move ends its eighth year of negative rates after years of keeping rates low to stimulate growth and inflation.

The European Central Bank’s policymakers said that the 50bps rate hike in July was necessary as a form of frontloading, bringing forward a policy move to increase the effectiveness of its price stability mandate. The minutes from the ECB’s July meeting said they wanted to normalise monetary policy rather than indicate a change in the rate to be expected as the end point of the normalisation cycle.

Analysts expect that ECB will raise its interest rate by another 50bps.

Canadian Employment Data | 9 September 2022

The Canadian economy lost over 30,000 jobs in July, extending the 43,000 cuts from the previous month. The unemployment rate remained at 4.9%, the lowest on record. Analysts forecast another 20,000 additional jobs for August, which would cause the unemployment rate to remain at 4.9%.

US stocks declined on Friday, continuing its previous slide and suffered a third-week loss despite the US Nonfarm Payrolls data showing some signs of easing in the labour market. The US Nonfarm Payrolls rise by 315K in August, but at a more moderate pace following the 528k increase in July. However, the growing expectations of a supersized 75 bps Fed rate hike move at the September policy meeting continued to undermine the equity market, as Fed Chair Jerome Powell said that the central bank will raise rates further and keep them elevated until price gains slow. In the Eurozone, the news reported that the gas pipeline of Russia’s Gazprom to Europe can’t reopen as planned on Saturday has weighed heavily on market sentiment, as a new technical issue has been discovered. On top of that, the Eurozone money markets are now pricing in a roughly 80% chance of a 75 basis-point ECB rate hike this week.

The benchmarks, S&P 500 and Dow Jones Industrial Average both suffered daily losses on Friday as the US job data did little to alter the views on the Federal Reserve’s next move. The S&P 500 was down 1.1% daily and the Dow Jones Industrial Average also dropped with a 1.1% loss for the day. Ten out of eleven sectors stayed in negative territory as the Communication Services and the Real Estate sectors are the worst performing among all groups, losing 1.86% and 1.68%, respectively. The Nasdaq 100 meanwhile fell the most with a 1.4% loss on Friday and the MSCI World index was down 0.8% for the day.

Main Pairs Movement

The US dollar edged lower on Friday, extending its previous slide and witnessing fresh selling after the release of the mixed US Nonfarm Payrolls data. However, the DXY index regained positive traction during the US trading session, then rebounded back to the 109.7 area to recover most of its daily losses. Traders now see a 75% chance of a third straight 75 basis points rate hike in September and expect rates to peak at 3.90% in March 2023, which gave recovery strength to the safe-haven greenback.

GBP/USD edged lower with a 0.30% loss on Friday despite the weaker US dollar across the board. The Federal Reserve’s aggressive tightening of monetary policy and a bleak outlook for the UK economy continued to exert bearish pressure on the cable. The GBP/USD pair climbed to a daily high near the 1.159 level in the US session but then retreated towards the 1.150 mark to erase its daily gains. Meanwhile, EUR/USD failed to preserve its upside traction after the release of US job data and remained under slightly bearish pressure near the 0.9950 level. The pair was up almost 0.10% for the day.

Gold surged with a 0.90% gain for the day after climbing to a daily top near the $1,718 mark in the early US trading session, as the higher US Unemployment Rate helped the precious metal to extend its bullish correction. Meanwhile, WTI oil failed to extend its rebound after rising to the $89 area during the US session, as the talks surrounding the US-Iran oil deal contrast with the expectations of output cut from the OPEC+.

Technical Analysis

EUR/USD (4-Hour Chart)

The EUR/USD pair advanced on Friday, regaining some bullish momentum and recovered from the 0.991 area that touched yesterday following the release of the mixed US monthly jobs report. The pair is now trading at 1.0001, posting a 0.58% gain daily. EUR/USD stays in the positive territory amid the broad-based US dollar weakness, as the falling US Treasury bond yields and the risk-on market environment both exerted bearish pressure on the greenback and lifted the EUR/USD pair higher. The US Nonfarm Payrolls rose by 315,000 in August, which came in slightly better than the market expectation of 300,000. But expectations that the Fed will stick to its aggressive policy tightening path should limit the losses for the US dollar. For the Euro, the dollar dynamics and geopolitical concerns will remain the key focus for the shared currency.

For the technical aspect, the RSI indicator is 53 as of writing, suggesting that the upside is more favoured as the RSI stays above the mid-line. As for the Bollinger Bands, the price preserved its upside strength and crossed above the moving average, therefore the upside traction should persist. In conclusion, we think the market will be bullish as the pair is heading to test the 1.0033 resistance. A break above that level could open the road for additional gains.

Resistance:  1.0033, 1.0054, 1.0082

Support: 0.9979, 0.9937, 0.9917

GBP/USD (4-Hour Chart)

The GBP/USD pair edged higher on Friday, staging an upward correction and touched a daily high near 1.159 level during the US trading session amid the positive shift witnessed in risk sentiment. At the time of writing, the cable stays in positive territory with a 0.27% gain for the day. The mixed US job data today has undermined the US dollar and helped the GBP/USD pair to find demand, as the slightly better-than-anticipated headline NFP print was offset by an unexpected rise in the unemployment rate. But markets are still pricing in a greater chance of a supersized 75 bps Fed rate hike move at the September policy meeting. For the British pound, the gloomy outlook for the UK economy continued to act as a headwind for the currency.

For the technical aspect, the RSI indicator is 38 as of writing, suggesting the bullish shift in the pair’s near-term bias as the RSI started to rise sharply toward 50. As for the Bollinger Bands, the price witnessed some buying and climbed toward the moving average, therefore the upside traction should persist. In conclusion, we think the market will be bullish as long as the 1.1534 support line holds. On the upside, a four-hour close above the 1.1684 resistance will let the buyers show their interest and lift the pair toward 1.1700.

Resistance: 1.1684, 1.1738, 1.1853

Support: 1.1534, 1.1476

XAU/USD (4-Hour Chart)

Gold catches some upside traction and surges to a daily high in the US session on Friday as the US dollar and US yields slide from high. It seems that gold price has snapped a five-day losing streak to a multi-month low and is currently placed around the $1,715 level.

For the technical aspect, the RSI indicator is 50 as of writing. The RSI advanced from the oversold zone to mid-line as the pair staged a strong upside correction. As for the Bollinger Bands, the gold prices surged and crossed above the moving average, however, the moving average is still downward and traders should wait for more signals before making any aggressive bets. The support at the $1,680 level seems to be safe for now, which is a crucial support region for the gold prices since May 2020. If gold price closes negative below, it may drop to a two-year low, which could be a major blow. In conclusion, despite the rebound on Friday, we think the market is still under pressure as there is no clear evidence that gold price has formed an upward trend. For more clues on the Fed rate hike, eye on tier 1 economic figures from the US.

Resistance: 1765, 1803

Support: 1685

Economic Data

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US stocks declined on Thursday, as traders recalibrated rate-hike expectations after central banks across the globe vowed to step up their fights against inflation. Federal Reserve officials in recent days quashed hopes of a dovish pivot, a view that had helped fuel bets that this year’s bear market is over. Since then, investors have been sifting through sometimes conflicting economic data for further policy clues. While job openings data on Tuesday underscored tightness in the labour market, revamped ADP data on Wednesday showed US companies increased headcount at a relatively sluggish pace in August. All eyes will be on the job report on Friday for further hints about the central bank’s path.

The S&P500 and Dow Jone Industrial Average benchmarks slid on Wednesday, as all major indices had their worst month since June. Ten out of eleven sectors in S&P500 stayed in negative territory, as Material performed the worst among all groups, dropping with a 1.21% loss on daily basis. The Dow Jone Industrial Average fell 0.9%, the Nasdaq100 slipped by 0.6%, and the MSCI world index decreased by 0.8% on the last day of August.

Main Pairs Movement

The US dollar was little changed on Wednesday, as European Central Bank members have joined the fight to combat inflation, also expressing strong determination at the Jackson Hole symposium. The DXY index witnessed new transactions and touched a daily high level above 109.2 during the early UK trading session, then weighted by heavy selling pressure and fell to a daily low level below 108.4 at the beginning of the US session.

The GBP/USD slipped with a 0.29% loss on daily basis for the day, as strong US greenback across the board. The cables stably climbed to a daily high level above 1.169 in the middle of the Asia session, then tumbled and oscillated in a big range from 1.160 to 1.165 during the US session. Meantime, EUR/USD surged to a daily high level above 1.007, as hawkish central bankers. The pair advanced by 0.39% daily basis for the day.

Gold plunged with a 0.75% loss on Wednesday, as aggressive Federal Reserve bets. XAU/USD extended its weakness on the last day in August, while the yellow metal displayed a pullback during the UK trading session, then weighted by downside traction to keep falling to a month-low below $1,710 marks.

Technical Analysis

EUR/USD (4-Hour Chart)

The EUR/USD pair advanced on Wednesday, regaining positive traction and extended its daily gains toward the 1.0050 area in the early US session amid renewed US dollar weakness. The pair is now trading at 1.0045, posting a 0.33% gain daily. EUR/USD stays in the positive territory amid a weaker US dollar across the board, as the disappointing ADP employment report from the US undermined the greenback and helped the EUR/USD pair to find demand. The data showed on Wednesday that private sector employment in the US rose by 132K in August, failing to meet the market expectation for an increase of 288K. For the Euro, the expectations of a 75 bps rate hike at the ECB event in September have provided support to the shared currency, as higher-than-expected inflation figures in the euro area might result in potential shifts to a more hawkish stance from ECB’s policymakers.

For the technical aspect, the RSI indicator is 59 as of writing, suggesting that the upside is preserving strength as the RSI climbs higher toward 60. As for the Bollinger Bands, the price witnessed heavy buying and rose sharply towards the upper band, therefore the upside momentum should persist. In conclusion, we think the market will be bullish as the pair is heading to test the 1.0089 resistance. The rising RSI also reflects bull signals.

Resistance: 1.0089, 1.0171, 1.0246

Support: 1.0016, 0.9980, 0.9917

GBP/USD (4-Hour Chart)

The GBP/USD pair edged lower on Wednesday, remaining under bearish pressure and turned south towards the 1.161 area heading into the US trading session amid the risk-averse market environment. At the time of writing, the cable stays in negative territory with a 0.07% loss for the day. Despite the weaker US ADP private sector employment data having exerted bearish pressure on the US dollar during the second half of the day, the fact that investors continue to reprice aggressive ECB and Fed rate hike expectations might limit the losses for the greenback. For the British pound, the worsening energy crisis in the UK and the rising expectations for a more aggressive policy tightening by the Fed continued to act as a headwind for the GBP/USD pair. The market focus now shifts to the US Nonfarm Payrolls report this Friday.

For the technical aspect, the RSI indicator is 35 as of writing, suggesting that there is more room on the downside before the pair’s technical rebound as the RSI stays above 30. As for the Bollinger Bands, the price preserved its bearish strength and dropped toward the lower band, therefore the downside traction should persist. In conclusion, we think the market will be bearish as the pair is testing the 1.1655 support. Sustained weakness below that critical support should lead to a steeper decline toward a two-year low set near the 1.1500 area.

Resistance: 1.1738, 1.1780, 1.1853

Support: 1.1655, 1.1476

XAU/USD (4-Hour Chart)

Gold price turned south in the European session and fell to a fresh monthly low below the $1,710 level on Wednesday. However, the price recovers from the monthly low in the US session as US yields retreat and the US dollar index turns negative after ADP data. The employment numbers came in below expectations with the private sector adding 132K jobs versus the 300K of market consensus.

For the technical aspect, the RSI indicator is 34 as of writing, maintaining a downtrend in the near term, which suggests that the price is still in bearish mode. As for the Bollinger Bands, gold price edged lower along with the lower bound, but maintained slightly above it, showing that correction risk is relatively low at the moment. In conclusion, we think the market is still under bearish pressure as the price couldn’t advance above the former high but closed at a lower low below the $1,710 level, suggesting that any rebound is still seen as a selling opportunity by market participants. Price is now testing support region at $1,715 level as of writing. If the price closes negative below $1,715 on the 4H chart, it may head to test the next pivotal support at the $1,685 level. For more price action, market participants now pay close attention to ISM Manufacturing on Thursday and Nonfarm Payrolls on Friday, which largely determines the following path of gold price.

Resistance: 1765, 1803

Support: 1715, 1685

Economic Data

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US stocks ends at the lowest level in a month, as fresh data pointed to resilience in household and labour demand, affirming the Federal Reserve’s resolve to continue to be aggressive in its fight against inflation. Three regional Fed presidents, in separate remarks on Tuesday, reiterated Chair Jerome Powell’s intention to bring down inflation. A reading on job openings Tuesday added to signs that the labour market remains tight and wage pressures persist. Jobless claims will air Thursday before Friday’s August payroll report. Moreover, the Fed this week is also set to step up the unwinding of its near-$9 trillion balance sheet. Other risks range from China’s economic slowdown to an energy crisis that threatens to tip Europe into recession undermining the market mood.

The benchmarks, both S&P500 and Nasdaq100 slid on Tuesday and finished the session at their lowest level in a month. All eleven sectors of S&P500 stayed in negative territory, as Energy and Materials performed the worst among all groups, which dropped by 3.36% and 1.71% respectively for the day. The Dow Jone Industrial Average fell 1%, Nasdaq 100 tumbled with a 1.1% loss, and the MSCI world index also decreased 1% on Tuesday.

Main Pairs Movement

The US dollar was little changed on Tuesday, as the market priced the huge interest rate hikes by U.S. Federal Reserve and the European Central Bank (ECB). The DXY index edged lower and touched a daily low level below 108.3 in the first half of Tuesday, then regained bullish momentum and surged to a daily high level above 109.1 following the announcement of Consumer confidence readings. However, the greenback then weighted by heavy selling pressure, dropped and oscillated in a range from 108.6 to 108.9.

The GBP/USD dropped with a 0.45% loss daily for the day, as the data this week so far has kept the hawkish sentiment going. The cables dropped dramatically and touched a daily low below 1.1626 following the surprised US CB Consumer Confidence, then little corrected and wandered to a level around 1.1660. Meanwhile, EUR/USD tumbled with a huge loss to a level around 0.9983, then corrected to a level above 1.001. The pair advanced with a 0.18% gain on daily basis on Tuesday, after upbeat statistics from Germany, as well as hawkish comments from the European Central Bank (ECB) policymakers.

Gold dropped with 0.75% losses for the day, drifting back closer to a one-month low. The aggressive Fed rate hikes bets drive flows away from the yellow metal, XAU/USD tumbled and oscillated around $1,724 marks after the US consumer reading.

Technical Analysis

EUR/USD (4-Hour Chart)

The EUR/USD pair edged higher on Tuesday, failing to extend its intra-day rebound and retreated from daily highs that touched in the European session after the release of upbeat US data. The pair is now trading at 1.0002, posting a 0.09% gain daily. EUR/USD stays in the positive territory amid renewed US dollar weakness, but the higher US yields and improving economic data have both provided support to the safe-haven greenback and exerted some bearish pressure on the EUR/USD pair. The US CB Consumer Confidence Index improves to 103.2 in August, which came in better than expected and helped the greenback gather strength against its rivals. For the Euro, the German Annual CPI inflation rises to 7.9% in August, which is higher than the market expectation of 7.8% and showed that inflation in Germany continued to rise.

For the technical aspect, the RSI indicator is 56 as of writing, suggesting a bullish tilt in the near term as the RSI on the four-hour chart climbed above 50. As for the Bollinger Bands, the price regained some upside traction and rose higher toward the upper band, therefore the upside momentum should persist. In conclusion, we think the market will be slightly bullish as the pair is heading to test the 1.0033 resistance. A breakthrough at that level should lead to additional gains toward the next resistance at 1.0089.

Resistance: 1.0033, 1.0089, 1.0171

Support: 0.9991, 0.9917

GBP/USD (4-Hour Chart)

The GBP/USD pair declined on Tuesday, coming under bearish pressure and dropped to a daily low below 1.1640 level in the early US trading session amid growing worries about a deeper global economic downturn. At the time of writing, the cable stays in negative territory with a 0.50% loss for the day. The expectations that the Fed will continue to tighten its monetary policy at a faster pace and a possible 75 bps rate hike move at the upcoming policy meeting both continued to act as a tailwind for the US dollar. The market focus now remains on the US jobs report (NFP) that will release on Friday. For the British pound, the currency might remains under pressure as the Bank of England had predicted earlier this month that the UK economy will enter a prolonged recession from Q4 of 2022.

For the technical aspect, the RSI indicator is 35 as of writing, suggesting that the downside is preserving strength as the RSI dropped sharply toward 30. As for the Bollinger Bands, the price witnessed fresh selling and declined toward the lower band, therefore a persistent selling interest can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.1655 support. Sustained weakness below that critical support should lead to a steeper decline toward a two-year low set near the 1.1500 area.

Resistance: 1.1738, 1.1780, 1.1853

Support: 1.1655, 1.1476

XAU/USD (4-Hour Chart)

Gold struggled to capitalize on yesterday’s gain from the $1,720 level and met with a fresh supply on Tuesday. The steady intraday decline extended through the US session and dragged the XAU/USD to the one-month low at the $1,720 level. Despite modest US dollar weakness and a further decline in the US Treasury bond yields, gold price struggles to advance as firming expectations for a 75 bps Fed rate hike at the September meeting. Hawkish comments from Fed Chair Jerome Powell on Friday reaffirmed these bets, which also weights on the gold price.

For the technical aspect, the RSI indicator is 36 as of writing, declining from mid-line on the trade of the day, which suggests that the persistent bearish mode could be expected. As for the Bollinger Bands, gold price sustained pressure from the downward moving average and declined to the lower bound, showing the downward traction influence on the gold price. In conclusion, we think the market is still under bearish pressure as the price couldn’t capitalize on the previous day’s bounce and closed at a lower high at the $1,740 level on the 4H chart. The price hovers around the $1,720 level as of writing, which is close to the support region at the $1,714 level. If the price closes below, it may head to test the pivotal support region at the $1,685 level, which is at a multi-year low and acts as key support for gold investors.

Resistance: 1765, 1803

Support: 1714, 1685

Economic Data

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