Speculative currency trading is a high-risk/high-return game. Currency investing diversifies this risk by taking many different positions in many different exchange rates. The risk/return characteristics of currencies are different from other asset classes and among individual exchange rates.
The volatility of major currency pairs, such as EUR/USD, is typically less over the course of a year than the volatility of the S&P 500 Index. The problem is that investors look at short-term volatility and use that as a general measure of risk. That won’t work for currencies as an asset class.
If all forex participants were speculative traders, the story would be different. But they’re not. The majority of forex trades are made not to bid up prices but to cover outstanding positions and otherwise maintain stability.
Positions are taken based on many different perceptions of the market—using strategies that include technical analysis, economic indicators, interest-rate differentials (the “carry tradeâ€), and derivative plays based on emerging as well as major currencies. This multiplicity of “currency views†enhances the natural diversification effect of currency investing.
In the short term, there may be no easily defined relationship between risk and return in forex. Over longer periods, however, valuation trends are slow to change, and it is possible to take advantage of established flows. Read more
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Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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