In this series of reports, I will be providing an overview of the topics we cover in our weekly lessons and breaking down the most recent lesson.
One of the main benefits of being a student in the weekly lessons is the continued learning you experience. You are part of a community of like-minded individuals, where you can learn from myself as well as one another. Not only are you invited to a live 90-minute weekly lesson with either myself or one of my senior traders, but you also receive full access to the past two years of recorded lessons and are invited to our private discord channel. During the live weekly lessons, we cover everything around the financial markets, ranging from; trading strategies to macroeconomics, to stock picks and investment opportunities. I will show you my live actual trades and explain my thought process behind them. These trades will be trades I’ve placed recently or sometimes I open the trades live on the lesson so you can see exactly what I am doing and why.
Lesson #111: Macros and FX – Monetary Policy
For example, the most recent weekly lesson covered monetary policy and how it influences the financial markets, in particular the trend of currency pairs. One of the common differences we see between retail and institutional traders is the degree of competence in fundamental driving forces behind the market moves. Many retail traders do not understand or simply choose to ignore how the current political and economic climate can determine the overall trend of the market and explain why one currency strengthens against its peers over a period of time.
Therefore, an understanding of macroeconomics and fundamentals can provide traders with an edge in the marketplace; the very nature of trading. We believe this form of understanding is essential for high probability, effective trading as it allows a trader to trade with momentum; develop an understanding of why and how institutions are positioning themselves in regards to one currency over another.
So what is Monetary Policy?
Monetary policy is the protocol taken by a central bank to influence the circulation of money in a country’s economy and the cost of that money. Money is a commodity, influenced by supply and demand factors.
So far in 2022, controlling the rapidly increasing levels of inflation has become the main priority for central banks around the world. Just like other commodities, such as oil and gas, money has a cost in the form of interest rates. A rise in interest rates, in theory, reduces the spending in the economy as the price of money increases. This leads to a reduction in economic growth as Gross Domestic Product (GDP) is squeezed and therefore the demand for goods and services is reduced meaning suppliers look to decrease their prices to entice demand. Which in turn reduces inflation.
Record high inflation rates have been a consequence of the influx of money following the COVID-19 pandemic and low-interest rates. Excessive quantitative easing through asset purchase programs and furlough schemes were used throughout 2020 and 2021 to hold the global economy as the world shutdown. This ‘cheap’ money has led to increased spending, creating a high velocity of money, where money is exchanged between people frequently for soaring price increases. Supporting their respective economies throughout the pandemic was the priority for central banks, but now the tune has shifted from expansionary monetary policy to contractionary monetary policy.
One of the main contributing factors to rising inflation has been the current Russia-Ukraine war, tightening global supply chains. The conflict has been followed by swift sanctions and an embargo against Russian exports. As the largest natural resource producer in the world, this decision has held a heavy weight on gas and oil prices. Energy prices have a major bearing on inflation figures, which at the time of writing, is currently at 9.1% for the UK & US.
How does it impact the markets?
The consensus on the direction of monetary policy is that the major central banks will be raising interest rates to tackle these issues. The situation between Russia / Ukraine is unlikely to go anywhere in the foreseeable future. Inflation is expected to continue as supply chains adapt to the current situations. As the market reacts to upcoming announcements, both retail and institutional traders can reasonably expect highly volatile conditions for the foreseeable future. Central banks have a job on their hands to balance raising interest rates to subdue inflation but do not want to risk increasing rates too fast too quickly to that may cause a recession and high levels of unemployment. Some economies can handle a faster increase in interest rates than others and this will impact their currency strength versus other currencies, which is exactly what we discussed in the weekly lesson.
How can you use this with your day-to-day trading?
Every trader cannot know exactly what is going to happen next. It is our job to consistently develop our understanding and allow our edge to play out over time. If we are combining our technical analysis tools with fundamental driving forces, we are trading behind the momentum for high probability conditions.
Remember that large financial firms and multinational banks make up a large majority of daily volume in the foreign exchange markets. These institutions move large amounts of currency based upon market releases, such as rising interest rates. Therefore, trading with the trend, alongside these institutions, can be an effective way to trade low-risk – high reward setups.
We want to avoid trading purely technicals or fundamentals. Our objective is to incorporate both technical analysis and fundamental understanding for additional confirmations behind our trade ideas. This is because we can get caught into FOMO moves, when the market may have already priced in the news. The announcement may see the price move in a different direction than what is initially expected in your analysis. However, when the two line up in confluence, it can make for some explosive moves.
To conclude, the current market conditions and overall market sentiment is creating turbulent price moves. Fears over rising inflation have forced major central banks to tackle the issues through rising interest rates. The monetary policy is indicating a willingness by policymakers for rapid restructuring of the world economy. This could lead to a global recession as supply chains tighten, company revenues drop, and employment rises. For now, we must continue to develop our understanding, using lessons like these to protect ourselves from upcoming events whilst also taking advantage of trading opportunities.
Topics like Monetary policy, covered in this article can be accessed via the Weekly lessons subscription below. We can use these lessons to develop our edge in the marketplace, giving us the best possible chance of trading success.
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