Global Interest Rates in Focus

11/02/2011 9:41 am EST

Focus: FOREX

Daniel Hwang

Senior Currency Strategist, Gallant Capital Markets

Interest rates and central bank announcements are critical to any forex traders daily routine, and FOREX.com’s Dan Hwang explains how he interprets and trades based on this critical data.

We’re talking about currency trading with Dan Hwang. Now Dan, tell us how you use fundamental analysis in conjunction with your analysis of currency pairs?

Well when we’re looking at trading currencies, I think one of the biggest factors that influence their action is going to be interest rates.

So most central banks tend to look at inflation levels, and off those inflation levels, they determine the direction of interest rates from there on. So one of the most important factors that we look at is direction of inflation.

So over the longer term then, how do you see that some of the moves from central banks around the world might affect the currency trade?

At this point, it’s pretty historic in terms of central bank policy action. We’re seeing inflation levels starting to decline a bit, but prior to this, inflation levels were moving to the upside, so we were seeing interest rates move higher.

But because of this deterioration, we’re seeing a demand in terms of the global growth outlook. I think there is potential for inflation to subside a little bit and central banks to keep policies loose in order to keep the global economy moving on from here.

So take a look at some of the specific currency trades that you believe over the longer term might have some potential.

I think one of the major currencies that we’ve been looking at is the euro/dollar (EUR/USD). Essentially, we’ve been looking at selling rallies in the euro for some time now because of the chance for the European Central Bank (ECB) to start reversing their policy stance.

We’ve seen that recently with the Bank taking on a bit of a more dovish tone. So moving forward, I think we’re looking at the ECB loosening their policy, and that should have a downside impact on the euro.

So with Trichet stepping down, do you foresee any changes in the ECB policy?

I think the ECB will have to keep policy loose just because of the issues that are ongoing with the Eurozone periphery. So in terms of policy stance, whoever is heading up the ECB will have to keep the policy towards more of an easier stance.

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