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Euro Remains Vulnerable After Sinking to One-Year Low vs. US Dollar

Talking Points:

  • New Zealand Dollar Gains as Terms of Trade Data Boost RBNZ Policy Bets
  • Euro May Continue Lower if German GDP, EZ PMI Revisions Disappoint
  • See Economic Releases Directly on Your Charts with the DailyFX News App

The New Zealand Dollar narrowly outperformed in otherwise quiet overnight trade, rising as much as 0.2 percent on average against its leading counterparts. The move followed an unexpectedly upbeat Terms of Trade report. The ratio of export vs. import prices rose 0.3 percent in the second quarter, topping bets calling for a 3.5 percent decline. The improvement in the island nation’s external position appeared to bolster RBNZ monetary policy bets, with the Kiwi rising alongside New Zealand’s benchmark 10-year bond yield.

Looking ahead, a busy European data docket is headlined by the final revisions of second-quarter German GDP data and Augusts’ Eurozone Manufacturing PMI print. The former release is expected to confirm that output in the Euro area’s top economy shrank 0.2 percent in the three months through June, marking the first contraction in over a year. The latter is seen matching preliminary estimates showing manufacturing- and service-sector activity in the currency bloc grew at the slowest pace in 13 months.

Eurozone economic news-flow has increasingly deteriorated relative to consensus forecasts since the beginning of the year. Indeed, data from Citigroup suggests realized outcomes are underperforming economists’ bets by the widest margin since June 2013 as of last week. That suggests analysts continue to underestimate the degree of economic slowdown in the region, opening the door for additional downside surprises. Disappointing results on today’s releases may help stoke speculation about a forthcoming expansion of ECB stimulus at this week’s policy meeting, sending the Euro lower. We remain short EURUSD.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Euro Bears Shouldn’t Expect QE from ECB This Week

Euro Bears Shouldn’t Expect QE from ECB This Week

Fundamental Forecast for Euro: Neutral

- ECB President Draghi’s commentary at Jackson Hole set the tone for a weaker Euro all week.

- Traders expecting action on Thursday might find opportunities in the EURUSD downtrend or EURJPY inverse H&S.

- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

The Euro was the worst performing major currency last week, extending its losing streak against the US Dollar to seven consecutive weeks. EURUSD’s -0.84% drop last week sunk it to $1.3131, its lowest exchange rate since September 6, 2013. In part. The US Dollar’s own stretch of strong data is helping keep it afloat; conversely, there is a great deal of negativity currently encircling the Euro.

The change in European Central Bank Mario Draghi’s tone has been significant since the Jackson Hole Economic Policy Symposium. Instead of ascribing the Euro-Zone’s low growth, low inflation, and high unemployment issues to ‘transitory’ factors, the head of the ECB among, other policymakers, is now accepting that the current weak economic environment is more or less a permanent condition.

Recent economic data has been so poor that another dip into recession across the Euro-Zone is possible – the third recession since the start of the global financial crises beginning in 2007. The Citi Economic Surprise Index fell to -45.1 on Friday, eclipsing the July low and setting a new yearly low for the year. The Euro’s problems are clearly related to economic and geopolitical concerns, as the liquidity conditions in the Euro-Zone are more than plentiful (EONIA fell at low as -0.04% on Thursday, the first time it has even been negative).

Even as Euro-Zone CPI hits its lowest levels since October 2009 (at +0.3% y/y), the aforementioned factors may not be enough to push the ECB into acting this week – at least in the unconventional, QE-inspired manner that market participants may be hoping for. The preferred timeframe to implement new measures is after October, when the ECB finishes collecting and analyzing banks’ balance sheets for the stress tests (AQR).

If it’s too soon for outright QE and meaningless to go forward with another rate cut given regional liquidity conditions, then perhaps the ABS purchase front will pique interest. Even then, substantive action may be falling short of expectations. The most significant steps taken might be downgraded inflation expectations; but that too is only dovish rhetoric at best. With non-commercials/speculators, at 150.7 net-short contracts, the most stretched since July 24, 2012 (155.1K contracts), any disappointment along the easing front could be enough to stoke a short-covering rally by the 18-member currency. –CV

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Canadian Dollar Faces Conflicting Cues from BOC, Key US Data

Canadian Dollar Faces Conflicting Cues from BOC, Key US Data

Fundamental Forecast for Canadian Dollar: Neutral

  • Canadian Dollar May Extend Advance on a Hawkish BOC Tone Shift
  • Upbeat US Data May Fuel Fed Rate Hike Bets, Undermining Loonie
  • Help Identify Critical Turning Points for USD/CAD with DailyFX SSI

Last week marked an important turning point for the Canadian Dollar, with prices reversing sharply higher after hitting the weakest level in almost four months near 1.10 against the currency’s US counterpart. The surge gathered momentum after US-based Burger King Worldwide Inc said it will buy Canada’s Tim Hortons Inc for US$11 billion, implying on-coming M&A capital flows favoring the Loonie in the pipeline. The deal’s supportive implications appeared to run deeper however. The news-wires narrative framed the transaction as a poster-child for a broader “inversion” trend, wherein US firms re-domicile abroad to take advantage of favorable tax policies.

While the latest price action demonstrates that M&A considerations are to be respected, their ability to fuel continued Canadian Dollar gains without support from baseline fundamentals seems inherently limited. With that in mind, the outcome of next week’s Bank of Canada (BOC) monetary policy announcement stands out as critical, with the outcome likely to prove formative for the Loonie’s direction in the near term. The last policy announcement in mid-July leaned on the dovish side of the spectrum, with the bank trimming its outlook for growth and establishing a longer timeline for the economy to reach full capacity. A building mound of evidence suggests Governor Steven Poloz and company may opt for a different approach this time around.

As if by design, Canadian economic news-flow began to dramatically improve relative to consensus forecasts on the very same day as the BOC issued July’s policy statement, with a Citigroup gauge showing realized data outcomes are outperforming expectations by the widest margin in 14 months. External developments have likewise proved supportive. July’s announcement stressed that Canada’s recovery “hinges critically on stronger exports”. This underscored the vital significance of a pickup in US demand, which accounts for close to 80 percent of cross-border sales. On this front, the landscape looks far rosier today than it did six weeks ago, with a run of supportive US releases suggesting the world’s largest economy is truly on the mend after a dismal first quarter. The Canadian Dollar may find a potent upside catalyst if these considerations bleed into the tone of the statement accompanying the BOC rate decision.

Looking beyond home-grown factors to macro-level considerations, the key theme still in play is the length of the expected time gap between the end of the Federal Reserve’s “QE3” stimulus effort in October and the first subsequent interest rate hike. Next week’s calendar offers plenty of inflection points to drive speculation. Manufacturing and service-sector ISM readings, the Fed’s Beige Book survey of regional economic conditions and the obsessively monitored Employment report headline scheduled event risk. Persisting strength in US data outcomes is likely to drive speculation that the FOMC will not wait very long before beginning to actively withdraw stimulus. If this triggers a one-sided surge in the US Dollar against its leading counterparts, the Loonie is unlikely to go unscathed.

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Gold Posts Monthly Gain But Prices Vulnerable Ahead of NFPs- $1271 Key

Gold Posts Monthly Gain But Prices Vulnerable Ahead of NFPs- $1271 Key

Fundamental Forecast for Gold:Bearish

Gold prices are slightly firmer this week with the precious metal higher by 0.48% to trade at $1287 ahead of the New York close on Friday. It’s been a lackluster month for gold traders and despite the volatility ($49 or 3.75%) prices are just 0.35% higher for the month of August. As we head into the open of September trade, the focus shifts back onto the economic data front as bullion holds just above the technically significant 200-day moving average.

As tensions in the Middle East and Ukraine continue to escalate, the relative support they have offered gold has continued to wane as the focus shifts back on to the outlook for monetary policy. With steady improvement in US data, interest rate expectations have crept forward keeping a bid under the greenback to the detriment of gold. As such, heading into next week all eyes will be fixated on the economic docket with ISM Manufacturing and Factory Orders on tap ahead of Friday’s highly anticipated non-farm payrolls report.

The shortened holiday week kicks off with ISM data on Tuesday with the consensus estimates calling for a print of 57.0 in August, down from 57.1 in July. Factory orders on Wednesday are seen much stronger with calls for a 10.8% print for the month July, a stark contrast to the 1.1% read seen a month earlier. Highlighting the week’s event risk will be the US employment report on Friday with August Non-Farm Payrolls expected to come in at 225K, up from 209K in July as unemployment downticks to 6.1% from 6.2%. As always, we’ll be closely eyeing the changes in the labor force participation rate when trying to assess the validity of the drop in the headline figure. Look for gold to come under pressure the stronger the data is, with a miss on the print likely to offer some relief to the battered metal.

From a technical standpoint, gold remains vulnerable for further losses as we open up September trade and while we will need to confirm that bias with a break of the monthly opening range, our broader outlook will remain tentatively bearish while below near-term resistance at $1292. A break above this region targets more significant resistance at the confluence of the 50-day moving average and channel resistance dating back to the July high at $1306 and we will reserve this level as our bearish invalidation threshold. Interestingly, gold has alternated positive and negative monthly closes for the last seven months and while we eked out a gain this month, suggests we should be looking lower in September. Key support rests at the August lows and the 78.6% extension off the July high at $1271 with a break below this level eyeing support objectives at $1258/60, $1251 and $1224. Look for major event risk next week to offer a catalyst with central bank interest rate decisions and the US employment report on Friday in focus.

—Written by Michael Boutros, Currency Strategist with DailyFX

To contact Michael email mboutros@dailyfx.com or follow him on Twitter @MBForex

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Japanese Yen Looks Ripe for a Reversal on Huge Week Ahead

Japanese Yen Looks Ripe for a Reversal on Huge Week Ahead

Fundamental Forecast for Yen:Bullish

The Japanese Yen traded to fresh lows versus the resurgent US Dollar on a relatively quiet week of trading. Yet the coming days promise significantly more volatility and may ultimately decide whether the USDJPY continues higher or remains within its year-to-date range.

Five major central bank decisions and a market-moving US Nonfarm Payrolls report will likely drive big currency moves in the week ahead. Japanese Yen traders should pay special attention to the Bank of Japan Monetary Policy decision due early Thursday morning, while the interest rate-sensitive USDJPY exchange rate frequently sees sharp volatility on surprises out of US NFPs data.

Traders widely expect the BoJ will keep their Quantitative Easing policies unchanged through their coming meeting, and indeed recent commentary from Governor Kuroda suggests that officials see little urgency in shifting course. It would likely take explicit reference to deflationary risks—unlikely—to force an important reaction in the Yen.

Focus will otherwise fall to US event risk, and recent declines in US Treasury yields point to muted expectations for key data ahead. Traders kept the US Dollar/Japanese Yen exchange rate near year-to-date highs despite the declines in US yields. Yet the breakdown in correlations can only last so long, and the Dollar remains vulnerable on any disappointments in top-tier data.

The risk of a significant Dollar pullback grew further as recent futures data showed large speculators traders hit their most short the Japanese Yen (long USDJPY) since it traded to ¥105 versus the Greenback. They’re likewise at their most long US Dollar versus the Euro (short EURUSD) since the EUR traded to $1.20 in 2012. Big sentiment extremes are only clear in hindsight, but stretched positions underline the risk of an important USD pullback.

It’s shaping up to be a critical week for the USD versus the Yen, Euro, and other major currencies; big event risk might determine whether it holds the highs or sees a seemingly-inevitable reversal.

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AUD Braces for Volatility on Torrent of Top-Tier Events

AUD Braces for Volatility on Torrent of Top-Tier Events

Fundamental Forecast for Australian Dollar: Neutral

  • AUD/USD Remains Resilient In The Face Of Geopolitical Turmoil
  • String of Major Domestic Economic Events On The Radar This Week
  • Range May Remain In Play If Fresh Data Fails To Shift RBA Policy Bets

The Australian Dollar is set to finish the week marginally higher as traders look past escalating geopolitical turmoil and return to yield plays. A drought of domestic data is set to give rise to a torrent of top-tier economic events over the coming week. These offer the potential to catalyse significant intraday volatility for the Aussie. Yet an escape from its multi-month range against the greenback may prove difficult without the requisite shift in RBA rhetoric.

Retail sales, PMI and building approvals data are all set to cross the wires throughout the week. On balance leading indicators for the health of the Australian economy have demonstrated resilience in the face of a ‘tough budget’. Another round of encouraging data could offer the Aussie a source of support.

While a less timely indicator, second quarter GDP figures will also likely provide the currency with some guidance. Quarter-on-quarter growth expectations are set relatively low (0.4 percent vs 1.1 percent prior). This may leave some room for an upside surprise which in turn would bolster the local unit.

Traders will also be wary of the potential for another surprise from the trade balance data due on Thursday. This follows the sharp decline witnessed for the June figures. Another significantly lower-than-anticipated reading could yield a knee-jerk sell-off in the currency.

However, the potential for all the aforementioned data to leave a lasting impact on the Aussie rests in the capacity to shape RBA policy bets. This may be somewhat limited in light of Governor Stevens’ recent reiteration of the Board’s preference of a ‘period of stability’ for rates. Another status-quo statement from the central bank on Tuesday could keep the Aussie contained between its 92 to 95 US cent trading band.

Finally, tensions in Eastern Europe are likely to remain on the radar for traders. Yet their influence over the high-yielding currencies appears to have waned. At this stage, it would take a significant escalation and greater international response to cause the required panic amongst traders to leave a dent in the AUD.

For an examination of how the US Dollar side of the equation may influence the AUD/USD read the weekly outlook here.

—Written byDavid de Ferranti,Currency Analyst, DailyFX

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