EUR/USD & AUD/USD Sentiment Boosted by PMIs
Have you ever heard the expression “Euro and Dollar sentiment,” and are not sure what it means? For those who have not heard this expression, it simply means that the price of one currency is inversely related to the price of another.
For example, if there were major news events or currency devaluations in a country like Brazil, the U.S. dollar and the Brazilian real would immediately start to rise. The reason for this is because investors believe that the Brazilian currency will soon strengthen against the U.S. dollar. Once it is strong enough, investors expect the U.S. dollar to start going down, which will make the Brazilian real rise in value.
If there are no major news events or changes in a country’s economy, or if there are very few foreign investors there, then the “Euro and Dollar” sentiment do not apply. The reason for this is because there are not many factors affecting the two currencies. While the U.S. dollar is strong against the British pound, most investors do not expect that it will become strong enough to overtake the British pound.
This is important to understand when evaluating countries like Brazil. If investors believe the U.S. dollar will start to weaken against the British pound, then Brazilians will naturally want to buy Brazilian currency to secure their savings, but if they believe that the British pound will become weak against the U.S. dollar, then they will feel confident that they can secure their savings by holding onto their Brazilian currency rather than buying U.S. dollars.
So how is the sentiment that the currency you’re trading is cheaper than the other when it is not known whether the dollar will strengthen or weaken affect your trades? First, we must define what it means to have an “ETP” or Euro-dollar pair (the two currencies are actually identical in size) and a “EWP” or U.S. dollar pair. Both of these pairs are actually correlated with one another, but they are not connected in the same way as is often used in reference to the Euro/dollar and U.S. dollar pairs.
To learn more about how the “Euro and Dollar” sentiment impacts your trading decisions, I recommend that you first read my other articles. These articles describe how “good”bad” a currency pair is for investing, and how this sentiment affects the movements of both currencies.
A good currency pair is one that is closely correlated with a strong index like the Dow Jones Industrial Average. These types of indexes are usually included in the “euro and dollar” sentiment because they provide continuous data for the two currencies.
This also explains why you do not want to trade either currency in anticipation of major news events that do not materialize. If the government decides to put on another round of large-scale tax increases or if major companies decide to raise prices, your decisions will be affected by whether or not the Fed increases its interest rates and what their impact will be on the price of either of the currencies. Because we are not able to predict these types of events, we should not pay attention to them until the markets actually begin to move.
Just because a currency is cheap and is not affected by major news events does not mean that the currency will always remain cheap. There are certain periods in history where the government goes into a bubble, which causes the government to create inflation and cause the price of the currency to rise to the point where the buyer is forced to pay the government or the Fed much more than their original purchase price.
In the case of Brazil, for example, we have seen that the price of the Brazilian real is typically set to fall while the Euro and the U.S. dollar are historically strong. As a result, you could find yourself trading the “Euro and Dollar” sentiment with a stronger one – it depends on how high the real falls in Brazil.
There are times when investors do find that a big trend is about to reverse direction and they end up losing money. This is because they are not able to fully anticipate what will happen and do not take into account the possibility that the trend will reverse and turn around.
In conclusion, if you are buying or selling the same currency, you need to know that the sentiment about that currency is not the same as mine. You should always diversify your investments between currencies before making any type of big moves.