Market overview.

There are generally two factors that determine a currencies strength or weakness.

The actual economic fundementals of each particular currency.

The overall 'risk sentiment' of the market.

Each currency reacts accordingly to its own particular correlation, whether that's to economic news or world events.

Recently, a currencies own economic health has played second fiddle to the world 'risk environment'. So thats where I'll start:

In January 2022, the world was in a precarious place financially. There appeared to be no end in sight to rising inflation, it was touted that interest rates (globally) could rise to 7% or higher. Why is this seen as a negative? Because, more people borrow money than save money. Therefore the higher the interest rate, the less money people have to spend. In this scenario, stocks fall and the 'risk off' currencies outperform. Which was the case until late 2023, inflation seems to have peaked and talk of rate cuts grew. This has set the scene for a potential 'risk on soft landing' scenario of rising stocks and strong 'high yielding' currencies, such as the AUD and NZD. In this environment the USD and JPY in particular will struggle. Which brings us to my base case expectation for 2024. Placing 'risk on' trades. Especially after pullbacks that create 1hr support. The risks to the 'soft landing trade' are:

1: A re-acceleration of inflation, perhaps caused by the economy doing too well, or rising energy prices.

2: The economy slowing too rapidly and falling into recession.

3: An out of the blue catastrophic global event, sending the market into panic.

Hopefully, none of the above will happen and we'll be able to trade the preferred 'risk on soft landing' trade. But whatever happens, we will always be able to trade the fundemental narrative, whether that's 'risk on' or 'risk off'.

Feel free to email any question: johnelfedforexblog@gmail.com

Best wishes.