What’s in store for EURUSD after ECB and US CPI

The European Central Bank (ECB) has been in the news a lot lately, as it debates whether or not to raise interest rates. This has many people wondering what the future holds for the euro. Against the dollar, it’s a different story of its own, as the EURUSD outlook largely depends on how the USD performs. In this article, we’ll take a look at some of the potential scenarios that could play out.

Hawkish ECB, Bearish euro

Trading monetary policy decisions often produce the easiest of signals, but this time around Europe’s central bank has left many investors scratching their heads; a hawkish message by the ECB has led to a fall in the euro, contrary to conventional wisdom that hawkishness leads to bullish price action. 

The ECB’s message that they will raise rates did not come as a surprise to the markets, but the euro quickly fell against the dollar as yield spreads widened due to the softer stance the bank took. This is a clear sign that investors are still worried about the fall-out of the Ukraine conflict and high energy prices, and the ECB’s ability to boost growth or tame inflation, which is not a surprise to the ECB itself when looking at its new projections.

While some of the ECB’s actions were widely anticipated, it overall sent a different message through global markets. Let’s examine how come.

Why the fall in euro?

There are a few reasons behind the decline of the euro, in fact, but the fall can be attributed mainly to expectations (in random order):

  1. Markets had reacted as expected before the ECB’s announcement, pricing in the positive plans for policy changes, including the official announcement of the end of QE (*but without ending PEPP before 2024). So, when the ECB announced that they would refrain from hiking twice in July, traders exited their positions while others short-sold the less aggressive rhetoric.
  2. The latest projections of the ECB show that inflation is expected to be at 6.8%, 3.5%, and 2.1% in 2022, 2023, and 2024 respectively, while growth projections have been revised downwardly at 2.8%, 2.1%, and 2.1% respectively. In other words, this could be seen as a period of stagflation in the eurozone.
  3. The European Central Bank’s policy rates did not change. Instead, they plan to raise the policy rate by 25bp in both July and September. Since they announced it will be unlikely to hike twice in July, a 25-basis point in June and July instead would have been a more-hawkish alternative.
  4. Markets are pricing a 50-basis point hike in September and so there is unlikely to be more room for tightening, negating much profit. Short-term rate differentials seem to be turning into a major driver of the EURUSD trajectory and this could be bad for the euro. Sentiment is currently geared towards risk aversion which is affecting some euro pairs negatively too.

Where’s euro headed then?

For one thing, it is now clear that the ECB is serious about fighting inflation. This is something that investors have been worried about for some time, and Thursday’s statement shows that the central bank is willing to take action to keep inflation in check. Which on its own merit is kinda bullish long-term.

Additionally, the expectation to cross back to positive rates will make it more costly for countries to borrow money and earn interest income. This could put upward pressure on government bond yields, supporting the euro, and the economy, but again, over the longer term. 

In the case of eur/usd, and the shorter term, a higher yield differential is likely to remain in favor of the US dollar as the European Central Bank (ECB) rates are expected to remain unchanged until July on one side, and hiked more on the other. This should continue to keep eur/usd weak especially as the Fed continues to hike interest rates. If the Fed pauses, however, the euro might reverse. But will it, and what does it depend on?

The dollar side of things

Simply put, because higher interest rates in the United States make the euro less attractive to investors right now, all eyes are on CPI inflation. It is what the Fed looks to decide on how aggressive to be going forward. 

CPI inflation continued to accelerate in the US, Friday’s report showed, as an uptick to a fresh 40-year high was seen.  Probably, this will have the Fed forced to go it more aggressively than what markets expect and demand for US yields will most likely rise. The Fed has already promised to pause after summer if core inflation (excluding energies and food) decelerates or cools off. Well, it did, when compared to last month’s print, but it missed expectations. This should at least leave investors to keep scratching their heads until next week (not to say until September’s meeting), when the Fed reveals its own policy. Until then, EURUSD is likely to remain under pressure.

Eurodollar technicals show parity

Even the weekly chart shows a bearish signal as the 50-week SMA crossed below its 200-week equivalent. A bear market on a longer-term timeframe. But we can also notice that the RSI is and has been oversold twice since ’21. The next move down below $1.0327 might provide a bullish divergence both on the MACD and RSI, which is well needed for a full-blown reversal. 

In the medium and short-term, the swing low seems to be major support, but it might give in even after providing a potential bounce. This brings us to fresh multiyear lows, with an aim down at parity. A surprise move would see the pair reaching $1.08, but further upside before a fresh low is highly unlikely.

Conclusion

Europe’s Central Bank faces uncertainty and has been inclined to continue unconventional monetary policy, but with downside risks to the eurozone economy, their decisions have been continuously narrowing. They just ended a long era of unconventional monetary policy in Europe, but it is yet to be determined whether or not the birth of new period of consistently rising interest rates has begun. If not, it’s highly unlikely the euro comes out of the ashes with Fed spearheading the cycle without a halt.

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What to Expect from the NFP on Friday?

The U.S. jobs report is one of the most anticipated economic indicators in the world and will be released on Friday at 12:30 PM UTC! Here are some key takeaways from the jobs report and how it could affect your trading moving forward.

What are the U.S. Jobs Report expectations?

The Bureau of Labor Statistics (BLS) is set to release the jobs report for May on Friday. Here’s what you need to know.

The headline number for the jobs report is the non-farm payrolls figure, which measures the number of new jobs created in the economy during the month. The consensus among economists is that 325,000 new jobs were created in May, down from April’s figure of 428,000.

The unemployment rate is also expected to tick down slightly, from 3.6% to 3.5%. This would be the first time since February 2020 that the unemployment rate has fallen below 3.6%.

Average hourly earnings are expected to show a modest increase of 0.4%, after rising 0.3% in April. Year-on-year, average hourly earnings have increased by 5.5% but are expected to have fallen to 5.2% in May.

The jobs report will be closely watched by Federal Reserve officials as they decide whether or not to raise interest rates aggressively at their meeting later this month.

How could it affect the market?

The report is expected to show that employers added around 325,000 jobs last month, according to economists. That would be a solid number of jobs added, but it would still be below the pre-pandemic pace of job growth. In fact, at this pace, the U.S. jobs market would be expected to normalize in about three to four months from now. Still, though, a decent report should it meet expectations.

The unemployment rate is expected to tick down to 3.5% from 3.6% but that decline is likely due to people leaving the labor force rather than finding new jobs. There are plenty of jobs, but people are not attracted to growing job openings as wages remain stagnant. This is why the average earnings will play a critical role as people prefer to stay unemployed than earn a low wage as inflation remains at elevated levels. Particularly the faster month-on-month figure.

What does all this mean for the stock market?

For one thing, it suggests that the economic recovery may start to lose steam as people prefer to stay unemployed, denting economic production despite businesses looking to employ. That could weigh on stocks in the short run.

But it’s also worth keeping in mind that the job market usually lags the stock market by several months. So even if the jobs report is weaker than expected, it may not be enough to derail the ongoing rally. What might do, is month-on-month wage growth. Without beating estimates, the stock market will likely come under pressure or depend mostly on the headline and unemployment figures. If wages increase, though, this could enact a bullish reaction from traders.

How can traders take advantage of the NFP?

Well, the most traded asset during NFP is the Eurodollar. Since its also the most liquid asset, it naturally offers less volatility risk than other options. The SP500, USD/JPY, and Gold are also good choices.

On the technical side, EUR/USD has strong resistance at $1.07853 and support at $1.06088, where the 4-hour 200-moving average can be observed along with a range top. Below there, $1.04659 is the next major support.

At current, prices fluctuate in a tight range between $1.06370 and $1.06613. The next level up is the 38.2% Fibonacci of the $1.07853-$1.06256 leg at $1.06868, with the 4-hour 50-average observed a tad higher, near $1.07255. 

Now depending on the outcome of the report, the nearest levels are highly likely to be revisited, however, breaking past $1.07853 or $1.06256 will likely open the room to further directional momentum.

Conclusion

The jobs report is one of the most important economic indicators, so it’s always closely watched by investors and economists. This Friday, the jobs report is expected to show that the economy added about 325,000 jobs in May, which would be a solid number but not as strong as the 425,000 jobs added in April. The unemployment rate is also expected to tick up slightly to 3.5%. Overall, this jobs report should give us a good idea of where the Fed might be heading in the second half of 2022 as wage growth becomes a deciding factor in whether people take a job or remain unemployed.

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How Options Expiration Can Change How You Trade

Forex trading can be a very profitable venture, but it can also be quite dangerous. One of the risks you take when trading forex is the risk of options expirations. Many people are confused about how options work, and many don’t even know what an option is. This article outlines the basics of options, explaining why these have a significant impact on the markets and how you trade.

What are options?

Options are a type of derivative security that gives the holder the right, but not the obligation, to purchase or sell a certain quantity of an underlying security at a fixed price within a set period – the expiry time.

When options expire, they lose their value and the holder of the option can no longer exercise it. This is the main reason volatility rises closer to the expiry date.

But options can be used to speculate on currency movements too and can be very profitable if correctly timed. However, they are also risky and can lead to large losses if not exercised cautiously. This means that to trade a currency pair with less risk, you will need to know when its options will expire as you will be avoiding volatility. For forex pairs, expiration is typically on Fridays at 4 pm GMT. However, this can vary depending on the currency pair and broker. 

Here’s a simple example: Imagine you own a call option on GBP/USD at 1.20, and the price is below 1.20 at 4 pm GMT on Friday. Then your call option will be worthless and you will not be able to exercise it.  

But you don’t need to let the option expire worthlessly. You need to buy a put option instead, though. A put option allows you to sell an asset at a set price before it expires. If you always wondered why there are billions worth of volumes in options trading, look no deeper than the previous statement.

How does the expiration impact the forex market?

In the forex market, options are one of the most important instruments. This is because they allow traders to make bets on a variety of different market conditions. That way they allow institutions to protect their investments in the short term. So, the expiration date on an option is a key factor in how a certain pair will behave.

Options expiration has a big impact on forex pairs because it affects the number of options that are available for trading. When options expire, their prices typically decline. This means that there are fewer options available for purchase, and this can lead to higher prices when new options are issued. It’s also important to note that the number of contracts outstanding often varies based on the underlying currency pair. For example, when Japanese yen options expire, there may be a lot of them available for purchase, while when U.S. dollar options expire, there may be few available.

When options expire, their prices settle down to the strike price that was assigned when they were purchased. This can have a significant impact on the value of a forex pair, depending on whether it’s near or far from expiration.

But the impact of options expiration on forex pairs is complex and depends on a variety of factors including the market conditions at the time the options expire, and how much volume is involved in those particular markets. However, knowing about options expiration and how it can impact forex pairs can help traders make informed decisions.

Here’s how a trader can take advantage of option expiries

Let’s consider this –

 if an option expires worthless this will likely cause the price of the underlying asset to decline. Conversely, if an option has a high enough premium then it may cause the price of the underlying asset to spike. If you see an option expiring soon and its premium is high, consider buying the pair of the option you track to take advance of that particular currency pair’s move as it is used by institutions to increase their exposure. Conversely, if an option expires soon and its premium is low, you might want to sell the pair you track to take advantage of the movement institutions trigger in their attempt to reduce exposure.

How is an option worth trading at expiration?

Options expire at different times depending on the underlying stock. For example, options on the S&P 500 expire in three months, while options on the DJIA expire every six months. This can impact the price of an option as expiration nears, hence the price of the asset.

The more volatile an option is, the more it will change in value as expiration approaches. Volatility also affects how likely it is that an option will be exercised at expiration. Options with longer expirations are more likely to be exercised than those with shorter expirations.

For what is worth, a forex trader who needs to purchase no call or put options can take advantage of options trading as its expiration will affect the underlying price of the asset.

Conclusion

Options expirations can have a significant impact on the price of forex pairs. When an option is about to expire, the underlying asset will typically experience a sudden surge in demand. This increase in demand will cause the price of the asset to skyrocket, which is why it’s important to be aware of options expiration dates and plan your trades accordingly.

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5 ways to keep your capital protected from a market crash

In the past few years, stock market crashes have left many investors with substantial losses. Many of the losses involved can be attributed to taking risky and high-return investments, which led to decreased net worth. Because of this, investors need to take a cautious approach and protect their investment portfolios appropriately. 

Since it’s that time of year again when the stock market undergoes a tumultuous ride, many investors are understandably anxious. But what can you do to protect your capital – both now and in the future? In this article, we’ll explore five ways to protect your assets.

Build and maintain diversified portfolios

One way to protect your capital from a market crash is to build and maintain a diversified portfolio. This means investing in a variety of different types of assets, including stocks, bonds, commodities, and real estate. By spreading your money around a variety of different investments, you are less likely to be affected.

Another way to diversify is to have cash on hand. When the markets fall, many people panic and sell their assets quickly. This causes the prices of these assets to fall even further. If you are in cash, you can hold onto your investments and wait for the market to rebound. You can also buy the dip.

Identify which assets are riskier than others

Another way to protect your capital from a market crash is to identify which assets of your diversified portfolio are in a riskier position than others. The highest risk assets should be those that offer a lot of absolute return on a low level of total risk.

For example, you may want to avoid investing in stocks that are highly correlated with speculative oil. This means that if oil prices crash your stock holding won’t be affected as much. This makes it difficult to make money if the market crashes because you’ll lose money on both. This does not mean your stocks will always be profitable as they may experience short-term fluctuations, but they should generally do better over time.

Make a risk management plan

One of the best ways to protect your capital from a market crash is to make a risk management plan. This plan will help you to identify and manage the risks that are associated with your investment portfolio.

Some of the key steps in a risk management plan include identifying your risk tolerance, assessing your investment portfolio for vulnerabilities, and creating a financial safety net. By managing these risks, you can ensure that your capital is protected during any market downturn.

This is the best way to prevent yourself from being financially devastated by a market crash. The plan will help you evaluate your investment strategy and see what options are worth keeping or if it’s time to sell, regardless of how ‘protected’ you may think you are.

Manage your investment portfolio

An additional way to protect your capital during (not from) a market crash is to manage your investment portfolio actively at the time. This means hedging in low-risk assets and avoiding risky holdings. You should know which ones may do better than others when the time comes anyway.

A key step in managing your portfolio effectively is staying informed about the market. This means keeping up with news and updates on the markets so you can make informed decisions about your holdings. 

Managing your investment portfolio involves keeping enough money in reserve. This ensures that you have enough money to cover any unexpected expenses.

Prepare for the worst-case scenario

Finally, one of the most important things you can do to protect your capital from a market crash is to prepare for the worst-case scenario. This means having a plan for how you will handle any financial difficulties that may come your way.

Don’t panic if the markets go down – remember that it is always possible for the markets to rebound later on. Just take things one step at a time and stay calm and rational during these tough times.

And if it gets worse, be prepared for an extended period in which you may not have the wherewithal or liquidity to do the things that make you happy. Gather your important assets–take stock of your private information and business contacts–and be judicious with how you spend.

Conclusion

As we move closer to the second half of 2022, it’s important to keep your capital protected from a potential market crash. 

Many people have started to take cautious measures to protect themselves against it. You must take further steps ahead of time if you want to win this race before it’s too late.

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How Fibonacci Retracement and Extension Can Help You Beat the Market

Successful traders tend to be those who are in tune with the market they are trading. In this article, you will learn that the secret lies in Fibonacci retracements and extensions. By employing these simple tools, you will be able to take advantage of market opportunities no matter how volatile the market is.

What are the Fibonacci retracement and extension?

Fibonacci retracement and extension are technical analysis tools that can help you make informed decisions about where prices are relative to a trend and where they might go. Both use the Fibonacci sequence, which is composed of the Fibonacci numbers 0, 1, 1, 2, 3, 5, 8, 13… to calculate retracement and extension levels. And that way they provide traders with a tool for analysing price patterns and making better trades.

A Fibonacci retracement is simply a technical analysis term for measuring the distance between two points in a price chart. For example, if short-term buyers take the price from $50 to $55, the distance of $5 will be 100% the length of the move; thus, if prices started retracing from $55 to $50, a 50% retracement would be halfway through at $52.5.

Contrary, the extension uses three points for projecting the distance of the corresponding Fibonacci retracement, crossing $55 after the retracement. In that case, the third point is the actual retracement level – $52.5. Here’s an example using the same pricing model: imagine you own a stock that currently trades at $50 per share. If the stock rises by the day’s end to $55, the $5 is the distance of the short-term trend, which is where prices close the day. Now think that this stock falls 50% to $52.5 and finds support. Using the Fibonacci extension tool between $50, $55 and $52.5 will provide the usual 38.2%, 61.8% and 100% Fibonacci extension levels. If you considered buying the stock again to build up your position, the projection levels would come at $54.4, $55.6, and $57.5. When analysing charts, it’s important to understand how Fibonacci retracements and extensions can help you make better investment choices. If a commodity falls below its first support level of 38.2%, 50% becomes the next level of interest, and 61.8% next. The same goes for extensions, but the 38.2%, 61.8%, 100%, 161.8%, and even the 200% and 261.8% are used instead — depending on the reference points used to calculate extensions.

Why Use Fibonnaccis?

The Fibonacci retracement and extension tools are used based on the principle that prices tend to move in cycles. When one price falls below another, creating a Fibonacci retracement, it often rallies back up very quickly. This rally is known as a Fibonacci extension. By using them, you can predict when these rallies will happen and buy into the market before it crashes again.

This way of trading can be very profitable, as long as you can stay ahead of the curve. If you are not able to do this, then you could end up losing all of your money though. So, if you are not familiar with Fibonaccis, make sure to read along and test before investing money you can afford to lose.

How to use Fibonaccis effectively?

If you’re tired of watching stock prices go up and up, and then down again, Fibonacci retracements and extensions can help you take action instead.

When the Fibonacci retracement is printed on a bullish price chart traders can start considering taking long positions on the pullback.  The most powerful Fibonacci retracement level is the golden ratio of the 61.8% pullback. However, this does not mean that it is always reached. Usually, the retracement completes between the 38.2% and 61.8% levels. Well, that’s a big range, so, let’s see how we can get closer to the number.

First, it is important to be able to react quickly when prices start to drop. So, to project where the retracement might be complete, one way to help is through the use of the Fibonacci extension. It’s just this time, that it will be used to project the short-term decline to find a reference point where a retracement and an extension would meet; a Fibonacci cluster. Think that a cluster can be made when the 61.8% retracement and the 38.2% extension are at the same level.

When prices start to drop, it is often a good idea to buy into the market and not sell the short-term move as the trend has more chances to continue than reverse. Of course, Fibonaccis should not be used alone. If you are not careful, you could also get caught up in a price crash when you are long the retracement. To avoid this, you can use the Fibonacci extension again. This will allow you to protect yourself from getting hurt by a falling market by using the 100% extension as the invalidation level. That is – if prices retrace more than the 100% Fibonacci extension, then the short-trend trend is stronger, and a warning sign of downward impulsiveness.

Final thoughts

If you’re looking for a more technical way of helping you beat the market, then using Fibonaccis could be a great way to go.

There are a few things to keep in mind when using them: first and foremost, they should be used as a supplementary tool rather than as a standalone trading strategy on their own; secondly, it’s important to remember that retracements or extensions don’t always work – so don’t get too attached to them; thirdly, it’s important to have a solid understanding of technical analysis to use them effectively.

Overall, Fibonaccis can be an effective way of helping you make it through – so long as you understand how they work and use them sparingly.

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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Top Commodities to Invest in During Crisis

Since the war began there has been a bit of turmoil within the commodities world. Rising inflation and a strengthening dollar have fed hope within investors that many commodities’ prices will remain high.

In this article, we’ll quickly break down the commodities impacted by the current state of affairs and why – if so– they make a good investment in the near term.

What are commodities

Commodities are typically considered to be any good or product that is bought and sold on a market and is differentiated from things like services or abstract entities; a raw material that can be bought and sold at different prices. They are classified to be goods that one can easily store, transport, and insure.

There are two types of commodities which include a primary product and a non-primary product. The two main types are the “soft” and “hard” commodities. Soft commodities are anything that grows or is made locally and does not have to be transported (but sometimes they are exported so they do have to be transported) – such as cocoa beans or corn. Hard commodities –like gold and oil– have to be transported, so they may require clean fuel like natural gas or electricity; a commodity for a commodity.

Natural resources and agriculture commodities refer to raw materials that branch into the consumer market and food markets because they are used as input to production. Security commodities, like oil or gold, often have a future date set on them in which they will arrive as futures do on stocks — an individual can invest in a commodity and wait for it to arrive.

What impacts commodity prices?

The prices of different commodities are dependent upon several factors:

  1. Supply: Demand determines the price of a commodity by pushing the price up when it is high, and lowering it when demand falls. The supply will also change with time as new sources of a simpler commodity become available and current methods become outdated;
  2. Substitutes: Two commodities that have similar functions but unique qualities will have different price points. For example, if apples reduce in flavor because there are fewer available due to an early frost then an apple’s substitute orange would be more expensive because they have less availability as well unlike apples, they are juicy year-round;
  3. Exchange rate:  The cost or price that one country’s currency buys concerning another country’s currency affects how much commodities are worth in that first country relative to the second.

Generally speaking, commodities prices are usually linked to the cost of production. For example, in recent years, commodity prices have risen because of a few factors including political instability and a looming economic crisis that disrupts production.

Which commodities are affected by crises?

Some stand-out commodities that are more likely to endure and potentially flourish when there’s a crisis are precious metals, agricultural goods (such as coffee and sugar), and grains (such as wheat).

If history is something to go by, during the 2008 financial crisis people started seeking out inflation-adjusted investments like commodities to protect themselves from the downturns in the market.

An older example in the history of commodity trading is the Arab Oil Embargo of 1973. Although it was about oil, the crisis impacted all commodities. Food and energy prices were affected the most. The price of oil had increased by over 400% in the months following the embargo. Food prices had also increased due to decreased supply. In the US, they were up by as much as 10%.

In general, all commodities are impacted by a crisis to some degree, due to how globalized the world economy is. But some are impacted more than others.

Why are commodities popular right now?

The most popular types of commodities right now are oil and gas, agricultural foods, and metals. They are becoming even more popular because people are afraid they may become scarce due to the war in Ukraine.

The war has put Russia in direct conflict with the U.S. and other countries. Economic sanctions on Russia, which is a major energy producer that relies on oil and gas for 80% of its revenue, have cut energies off from European and other markets. This has caused an increase in prices everywhere because so many countries rely on exports from Russia and Ukraine.

Ukraine and Russia together account for 29% of the world’s wheat trade and Ukraine alone 20% of the world’s corn and is the biggest China exporter. Consumers have good reason to be concerned as supply disruptions have been an issue during the pandemic. The current supply issues exaggerate the phenomenon as Ukraine’s land is a very fertile one.

The price of some different types of metal, including steel and iron, has dramatically increased due to the recent war in Ukraine. Ukraine ranks 8th in iron and steel production globally. The shortage of metals that are needed in the military and carmaker industry to produce weapons and cars, such as nickel, also skyrocketed. Palladium and platinum are also impacted, as Russia accounts for 37% and 9% of the world’s production.

On the other hand, other metals such as gold and silver are considered popular commodities as people turn to safe havens during crises.

Is investing in popular commodities now a good idea?

Investing in commodities can be complicated because there are so many different choices and factors to consider. There are also special considerations you need to take into account depending on what commodity you’re interested in.

For example, raw metals usually carry a speculative component that is reflected in the price and it takes more research to get good value.

On a different note, if a commodity’s price has already risen, then the investment will translate into a greater risk than reward. So, how does one go about investing in the right commodities?

How to choose the right commodity to invest in?

Choosing the right commodities to invest in can be tricky because their prices often fluctuate and there is no way to know when a crisis will get better or worse.

Overall, to decide which commodities are better than others to invest in, investors will have to look at the quality of the goods being produced as well as the current and future demand for the goods. A commodity that is used more for its supplied quality is a better choice than one that is used because it’s in high demand.

Some of the most important things to consider are:

  1. Which country they are based;
  2. How often they produce;
  3. What industry they are used in;
  4. How much infrastructure is built up around them to help ease transportation; and
  5. How technologically advanced their factories might be.

Oil is the most popular commodity for this reason amongst others because it generally produces steady returns without taking any effort on the behalf of the investor. Both natural gas and metals have an exponential growth rate along with oil, which makes these commodities extra attractive to investors.

Agricultural commodities can fluctuate according to the weather and industrial output tends to rise and fall with global economies and consumer behaviors. Energy can also fluctuate depending on factors like demand and government policies.

From a technical standpoint, one of the best determinations of a commodity’s downside is its historical volatility and how much it moves year over year. If you invest in a commodity that has a historical uncertainty to its downside risk, there is more potential for powerful positives than if it has a history of underperforming.

Which commodities have already spiked and why?

The war in Ukraine has already disrupted the supply chains several countries rely on for their production. Prices of several commodities have reached unprecedented levels and returned to their base, if not corrected at least, as the initial concerns have waned off – (since the war % | now %):

  • Natural Gas (+45% | +40%)

Nord Stream 2 is a pipeline project that would bring gas into Germany from Russia for the next 30 years. Russia is one of the biggest natural gas producers in the world and the biggest importer in Europe. The building of this pipeline would be beneficial to other countries because it would give them more access to natural gas and make it more affordable. Without it, the EU has to source LNG from the US and as a result, gas prices keep increasing as along with rising cost to transfer supply is scarce without Russia.

  • Wheat (+60% | +20%) and corn (+16% | +12%)

The Russian military invasion of Ukraine and ongoing fighting have disrupted crop yields. Fertilizer prices are up sharply in Ukraine over the past few weeks as well. Supplies of wheat are tight but India and Australia are filling the void. The question is whether the war will end soon, because this is the usual period to plant wheat.

  • Oil (+40% | +3%)

With the rising tensions in Ukraine and constant threats to the region’s stability, there is a significant risk that sanctions will worsen any supply disruptions. Despite this high chance of instability, the consensus among experts is that oil prices could still move down if sanctions are lifted. However, if they are not lifted, current downward crude oil expectations should be revised upward.

  • Palladium (+50% | -2%) & platinum (+12% | -12%)

Palladium and platinum are traditionally used in the automotive industry, so when supplies start to run low, prices tend to rise significantly. Since Russia is one of the most important producers of rare-earth metals, along with China, prices of palladium and platinum increased significantly. However, it was possibly due to the rise of tensions as investors were frightened that there may be a shortage in these metals due to sanctions or depleted mines. At least this is what their performance suggests.

Which commodities to invest in right now then?

A lot of people are worried about investing in commodities lately because the US dollar has been strengthening and as showcased above not all are poised to rip rewards.

Technically speaking it seems that the spike is done as the war is at least not getting worse. Natural gas is the only commodity maintaining a good grip on its gains as it is still up 40% since the invasion. This makes it a bad opportunity as it’s at the top! Wheat has gone from 60% plus to only +20%, and corn has barely printed any upside. On the other hand, oil has lost nearly all of its gains despite sanctions, making the whole price action questionable. Is crude oil so speculative? It seems so. Finally, when taking into account that both palladium and platinum are in loss, one wonders what is the best way to approach this market?

What is the best way to invest in commodities right now?

When there is a financial crisis, commodities investing can offer interesting opportunities. Commodities are very efficient at minimizing risk and doing it through avenues that are often overlooked.

For traders, taking advantage of the commodity market opportunities that arise during periods of crisis can be a quick way to rip some rewards. It could pay to look for the best investment and trade opportunities. But when the short-term opportunity seems to die out, the long-term one comes into the game.

In an increasingly globalized and connected world, it’s important to diversify investments across various asset classes. Investing in commodities long-term could provide a source of income amidst geopolitical uncertainty. Commodities also tend to remain stable in the event of economic or financial crises.

How to invest in commodities?

A dollar-cost average (DCA) strategy will help reduce the emotional stress created by fluctuations in commodity prices. It is a conservative investment strategy that doesn’t require any technical knowledge. The process involves buying or selling a particular CFD over some time. This will ensure that the investor takes advantage of price increases while also limiting losses if prices fall.

This strategy takes advantage of the trader’s patience and is based on the theory that markets go up and down, not just up. So, when prices are low, you buy more, and when prices are high you buy less. Take for example the prices of platinum; you would buy more as it’s already -12% compared to the invasion date. With this strategy, you can have more peace of mind knowing that lower purchases won’t be wasted if prices drop in a recession or even an economic downturn.

Why is DCA a good option?

Dollar-cost averaging is a strategy that spreads an investment out over time. By doing this, you are less reactive to short-term changes and the fluctuations will even out in the long run. It is also more psychologically effective, as it creates an idea of predictability so people know what to expect.

What is the downside?

In general, investing in commodities will shelter your portfolio during economic turmoil. It is becoming more common as the global economy shifts and it offers investors the opportunity to profit from short-term fluctuations as well as longer-term trends. However, it is short-term fluctuations that include a significant level of risk. If you have difficulty predicting their value, the downside risk is greater for you and you should seek a more stable and logical play.

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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Why Investing in Commodities Right Now Is a Good Idea?

Investing in commodities could be a good idea at any time, but when we are in times of crisis like a war, it can save you from losing everything – both figuratively and literally. The physical commodities may help you to survive, and the political situation could pull out of such lows (though they don’t usually). In this article, we’ll take a look at some things related to investing in commodities – and hopefully see why it’s a good thing to do!

How commodity prices react during war, political crises

Commodity prices tend to rise as a result of conflicts and crises. For example, natural disasters increase the need for commodities, which could raise their demand and value. The relative scarcity of certain goods also boosts price. Therefore, in times of crisis, investments in commodities are physically more appealing because they typically offer better returns than stocks, bonds, or currencies.

Since a country near our borders is at war, Ukraine faces different types of ‘disasters’, not so natural, but rather humanitarian and economical. People can’t get to the fields to grow or harvest. This situation affects their ability to produce food and other commodities. In return, not only can’t they supply domestically, but also cease trading exports. So, with Ukraine’s supply at virtually zero, some of the EU countries’ demand will increase while others may be able to source elsewhere, more expensive. Ukraine is a large exporter of corn and wheat.

Apart from food commodities, demand for energies has been skyrocketing not only from sanctions and post-pandemic mobility but during covid. See, when the war began, the West decided to sanction Russian gas and oil, which sent the price flying due to increasing fears of a supply cut.

How commodities are traded

Commodities started trading on a massive scale during World War One in 1914. This made it possible for small investors to get involved in the business without having to buy shares. With the reduced risk and increased profits, more traders turned to commodities like soybean, cocoa, cotton, and sugar around the same time WWI broke out.

A shortage of goods was a persistent problem, but some commodities like coffee had abundant supplies. This ensured that the beans were readily on the auction block at opportune moments.

If you think about it, trading goods on various markets is quite similar to trading stock and bonds online. Commodities generally pay dividends to their owners frequently when goods are bought and sold. Now, you have the offer opportunity to acquire stocks via commodities as a sort of speculation.

A good way to invest in commodities today is through the futures market (CFDs) where you trade contracts of different commodities, not individual units. Since these contracts are standardized, they can be traded internationally, which doesn’t raise any issues with price fluctuation.

Is commodity trading profitable?

Commodities are an excellent way to invest money you can afford to lose and receive great rewards, but they can also lead to losses if you are not careful. Like any other type of investment risk is involved as well as possible loss of principal. This means that there is a possibility that you could lose money even when taking into account inflation and the current state of affairs. Take for example the prices of oil. Everyone thought it would simply continue to go up when sanctions got harsher. They didn’t. A protective stop is a good way to minimize losses and be prepared for the next opportunity!

Investing in commodities can be risky because it involves betting against (or along with) institutions, but it can be potentially lucrative. On a plus note, trading commodities prompts global stability due to its power to fuel and sustain economies – making the risk worth the investment. So during times of high level of geopolitical instability, it is cheaper for investors to invest in commodities rather than purchasing stocks and bonds.

Key takeaways

Investing in commodities like gold, wheat, and oil can have a significant impact on an investor’s portfolio. In the event of war, commodity prices will surely rise because prices are driven by external influences, but they will fall again. But they say that smart investments during wartime can lead to an even greater profit when peace comes again.

Luckily, AmegaFX has an abundance of reliable investment options available. You can trade corn, wheat, soybean, cocoa, cotton, coffee, and sugar here:

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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How to use the RSI with Elliott waves

Nowadays, traders are constantly searching for ways to improve their trading and forecasting skills to accurately predict directional price movements.

The RSI is designed to measure both the magnitude and duration of such movements in an attempt to show whether buying power or selling power is stronger in any given period.

After reading this article, you’ll be much more confident about using the RSI with Elliott waves to make well-informed trading decisions!

What is the RSI indicator?

The RSI is a technical indicator that measures the speed and change of price movements. It evaluates the momentum of an asset’s price and it is used by traders to primarily identify overbought and oversold conditions in the market. It does this by measuring the strength of an asset’s recent performance by comparing it with its own average performance for a given time period, typically 14 days.

The RSI oscillates between zero and 100. A reading above 70 indicates that the asset’s price has been rising, while a reading below 30 suggests that it has been falling. A reading above 70 indicates an overbought condition, while readings below 30 indicate an oversold condition. How does this help Elliott wave traders, though?

What are Elliott waves?

First, let’s take a quick dive into what Elliot waves are all about.

Elliott waves are a technical analysis technique that is used to predict the trend of an asset. It was developed by Ralph Nelson Elliott and popularized in his book “The Wave Principle”. Analysing the waves, particularly their structure, can give traders insight into what the next direction of a trend could be.

The Elliott waves theory recites that a trend progresses in five waves (12345), while it regresses (or corrects) in three waves (ABC). The progressive waves are called motive waves, whereas the ones that regress are called corrective waves. In simple terms, a trend can continue to its predominant impulsive direction as long as corrections are made up of three and not five waves.

So, can this help traders at all? The simple answer is yes. But along with price action, one must be skilled in the advanced use of the RSI.

Main advantage of using the RSI with EW

Naturally, the RSI can be used in a variety of ways. It can be used to identify periods when prices may be less vulnerable to reversal and more likely to continue in their current trend, as well as periods when prices may reverse direction due to overbought/oversold conditions. Another popular way aside of its typical uses is to identify divergence. This is the most useful method when it comes to Elliott wave trading. Here’s why.

Divergence is used to identify potential reversals in an asset’s price movement by looking for discrepancies between prices and momentum. When prices are printing a higher high and the indicator a lower high, there is divergence. This signals an upcoming correction in prices. If a trader knows how to read waves, the information the RSI provides can be an eye-opener. Divergences don’t appear in every correction, of course, they typically appear after extended impulse waves.

Divergence and Elliott waves

If guidelines are anything to go buy when trading using Elliott waves, wave 3 is typically the strongest and thus the most extended. In a very bullish market, the RSI during wave 3 often continues to remain at an overbought region. So, if the market is overbought in wave 3, selling wave 3 is not the best short. An extended period of RSI above 70 signals that the trend is intact and thus it’s better to look for dips. The signal here is to wait for the correction to end, rather than short the correction, or even wait for wave 5 to end.

Wave 5 typically comes with momentum divergence. In an extended bullish market, this implies price makes new highs above wave 3 while the RSI makes a lower high, suggesting a selloff.  Remember that in wave 3 both price and the RSI make a new high in a bullish trend.

Thus, while the price can do 3 waves pullback in wave 4 after the top of wave 5 if the prevailing trend is bullish, it’s better to wait for the bigger correction after wave 5.

Key takeaway

The basis of using the RSI with Elliott waves is to use the divergence to test if a market is in wave 5 or not. Although it can be used to identify alternative structures or provide other types of signals, the most powerful signal for a beginner Elliottician is the recognition of an upcoming reversal in wave 5, both for a short or long trade.

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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The market’s reaction to the FOMC

The Fed’s current 25-basis points rate hike, in which it has been slow to raise, continues to be supported by inflation data. The committee is hawkish and expects one rate hike per meeting for 2022 as well as announcing the reduction of its balance sheet soon, which depended on the size and pace it can be equivalent to a hike. So, why did we see markets shrugging off the Fed’s new policy?

Was the Fed hawkish?

First off, the Fed was hawkish on interest rates and the economy in March with the central bank making clear its preference for policy hikes in 2022. “Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially”, said Jerome Powell.

The Fed did give more indicators about change in policy at this meeting. It did change its guidance for further rate hikes, which still seems fairly stubborn to a few as inflation stands way above expectations, and it also announced the reduction of bonds likely at the next meeting.

Following several years of easy monetary policy, some wonder if the Federal Reserve has been too slow to react and it might put the market in a bigger bubble. However, JP said that additional rate hikes should be expected also in 2023 and 2024, and hinted that the Fed might even sell bonds back into the market should more aggressiveness is warranted by incoming data.

So, not as dovish here to justify why markets reversed after some time into the presser.

Why did risk assets soar?

In fact, there have been several factors attributing to the post-release market sell-off, as explained above. One would expect the initial drop to just keep going, but instead, risk assets reversed.

Well, the Fed’s decision to hold off on a 50-basis points hike was seen as dovish. Inflation is at a 40-year high and JP himself said that the committee does not expect it to fall sooner than next year. So, why the initial dump, you may ask? It was a mix-up, really.

The 25-basis points hike was delivered as a 50-basis hike in multiple economic calendar outlets. It seems that instead of showing the rate hike, which is the routine data displayed, the figures showed where rates rose up to –0.50%. Until markets figured that out, and due to the Fed’s hawkishness, risk assets plummeted thinking that the Fed hiked 50-basis points.

Another reason for seeing a swift recovery was that no details were provided about the pace of the balance sheet reduction. Despite announcing the run-off, which is hawkish in itself, uncertainty about the pace and size took its toll. Investors got worried about the slow reaction of the Fed as if the unwinding needs to happen aggressively at a later stage, it could lead to a market crash.

Finally, reports that Ukraine and Russia had come close to agreeing on a compromise surfaced in the news. Apparently, the 15-points peace plan was one of the main factors leading to the reversal. It was later known, though, that the deal had not been confirmed by both sides.

The Fed was right

Fed Chair was very vocal about the risks global economies face due to the war in Ukraine, and he had every right to do so. Sanctions, inflation, and rising demand for commodities supplied from Ukraine and Russia will slow growth down. If the Fed would move too aggressively with a double hike, growth would dampen much faster, and this would create a bigger issue at hand for the committee.

On an interesting note, the Fed might have just done exactly what was needed to keep the markets from crashing. Will this lead to a worse crash, though, is the million-dollar question?

So, all in all, the Fed was hawkish but not as much as markets expected. Although on the hiking side this may have been the right choice, some certainty in the balance sheet reduction would have probably pushed risk assets lower, perhaps even offsetting the deal news. That is certainly a focal point to watch out for during the Fed’s next meeting.

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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Why is everyone talking about inflation?

Simply put, inflation is so important to today’s world economies because central bankers must use it appropriately to set monetary policy and conclude the correct course of rate increases over time. And you might ask why are interest rates important. It is because they determine the cost of borrowing, which spirals to several other components of investments, the economy et cetera. Despite interest rates affecting savers and borrowers differently, they can become dangerous for everyone.

Before we dive into the essential bits and pieces of inflation, let’s get started with some of the must-known basics.

What is inflation

Inflation is the increase in the price of the basic goods of a nation. There are many measures of inflation, but the most common inflation measure is the consumer price index (CPI), provided by the Bureau of Labor and Statistics. The central bank of the US, the Fed, uses the personal consumption expenditures (PCE) instead, which is prepared by the Bureau of Economic Analysis (BEA). There are many differences between the two, but the main ones are the broadness of data used to calculate PCE and how well it reflects consumer expenses unaccounted for in CPI.

A standard inflation rate is a 2% rise per year as a rule of thumb. That means an added 2% on every dollar spent. If a beer costs $5 today, next year it should cost up to $5.10. 2% is the Fed’s target. All policy changes aim at controlling inflation around the target rate of 2%.

As you already experience in your day-to-day expenses, 2022 is a year banks failed to keep inflation at bay. We will explore why below, but first, let’s talk about what can contribute to inflation hikes.

What can increase inflation

The rising of prices is a result of economic demand and supply factors. There are generally three reasons why inflation rates go up –

  1. Economic demand is higher than supply – e.g., oil is more expensive due to low supply owed to sanctions
  2. Inflation runs rampant – e.g., energy, food, durables, rent all rise due to rising demand, making inflation uncontrollable
  3. Hyperinflation; demand for money rises faster than inflation itself – e.g., prices of goods and services rise 1000% annually following the war in Ukraine

Inflation has risen due to the economy running hot amidst an abundant amount of money printed (stimulus) by governments during covid – increase in the money supply, access to credit, and more spending. When adding the lockdowns in the recipe and the fact that people were not using all their savings until after lockdowns eased, there is no question why the CPI reached 8% in February. Now, sanctions against Russia could turn inflation into the next financial crisis as they limit the supply of several commodity exports from Russia. Let’s not forget that broader supply constraints have been an issue amidst covid due to logistical problems. Inflation has been running hot for a little too long. The cost of goods has been on the rise.

From a broader perspective, and in more typical economic situations, the Fed looks at several indicators to gauge inflation expectations and set policy. The most important are GDP, leading consumer sentiment indicators, and indicators related to the jobs market, such as unemployment and wage growth. They still look at them, but when inflation continues to rise due to energy prices increasing, the Fed’s job becomes obscured as econometric models don’t work. Even if they did, they can’t stop people from spending and investing.

When does inflation become a problem?

When inflation is rising, unemployment is expected to fall because employers are forced to pay more; the spending power of the consumers (the employed workers) increases, and it spurs inflation – this is known as the Phillips Curve.

When unemployment is not falling or is relatively high and economic growth subdues, we get stagflation in an inflationary environment. Back in the 1970s, stagflation resulted from an oil shock amidst two wars; the Yom Kippur and the Iranian Revolution. The war between Russia and Ukraine sees the crisis re-unfold after 50 years.

Since the Fed’s only tool to control or reduce inflation is to raise interest rates, this can slow the economy, increase unemployment and lead to a recession. If they do it too fast, the risk of stagflation becomes big; if too slow, inflation could overshoot.

How can traders benefit from rising inflation?

Inflation isn’t always bad unless it turns into deflation, stagflation, or hyperinflation. But even then, investors can always find a way to hedge against downside risks and profit.

Precious metals are often the trade of choice as demand during recessions increases. Without the recession having hit us yet, being early could be the logical move. But what if it is too early? Well, in that case, you have to ask yourself: does it worth going in too early versus losing from increased spending prices? Sitting in cash might be your best option if the answer is no.

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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