 Hi everyone, hope you had a great new year and a great Christmas holiday and now we're back to trading actually in fact The market is still going to be quiet until probably somewhere around maybe the eighth to the maybe the 15th of the market will start to pick up and and yeah, so it's back to The grinding in right and so in this video. I'm going to be going over the Political business cycle and really why the I believe the Federal Reserve are going to be cutting rates and why the US dollar is likely to be a sell at some point this year over the medium to long term I think as we start the year in fact we could actually see And my bias is probably maybe more towards the buying side of the dollar in the first maybe two months of the year, but as we get closer to the elections in in the States then I believe that the Fed will start to cut rates and Many of you who understand fundamental analysis might be a bit confused because of the fact that the the US at the moment have a Growing economy right so inflation is falling and There's a growing economy now for those of you who are watching this video who again don't necessarily Know or I'm familiar I guess with how We look at the fundamentals and really fundamentals. I believe are driven mainly mainly By interest rates as well as risk off sentiment, right? But if we're just looking at the fundamental side of things right we have interest rates, let me just write this down so we've got interest rates and interest rates are either Hiked by a central bank. They're held by a central bank or they are cut by a central bank and Hiking rates usually and typically appreciates a currency cutting Typically devalues a currency right and now why would a central bank want to Influence the value of a currency and it's mainly due to a GDP, right? GDP and inflation So these two Influence what a central bank does with their interest rates and again just to put this in kind of really kind of basic and simple terms central banks will typically They have a 2% target. Yeah, and if 2% inflation target and if in If inflation is seen as trending above The 2% target and central banks will hike rates Yeah, and if it's seen as trending below the 2% target Yeah, central banks are likely to cut and that's what they do. That's what it done historically now where GDP comes into this is is when when when The economy is in the business cycle when it's expanding, right? So you have a business cycle which kind of looks something like this Right, and even that you have an inflation cycle and you have an interest rate cycle as well by the way and I'm gonna get into into cycles and so What you have is a is a GDP cycle where you have an expansion phase Right, so you have expansion you have the boom phase where you have lots of growth you have a contractions side of things and then you have the Recession then you have a bust or slump and then you have recovery and then you go into the expansion and Then boom phase again, right and the really this should be sorry. I've drawn this bit wrong It should kind of be like this right where you expansion and you normally typically have the boom again, right? so and then it goes back into the contraction phase, right, so that's the economic cycle and Typically in the in the economic cycle Central banks tend to Hike rates when they're in the expansion recovery expansion boom phase of the cycle and they tend to cut when they're in the contraction recession bust or slump phase of the economic cycle and inflation actually tends to rise the typically rises in that expansion boom phase and deflation tends to Historically take effect in the contraction Recession boom side of things, right? And so you can kind of overlay both cycles, right? So they high crates crates get hiked as inflation goes higher in the In the expansion boom phase and then in the contraction a recession Bust or slump phase you'll see inflation come down and then you also have the interest rate cycle, right? Which again you can overlay With these as well where you typically have a hike in rates Yeah, and then when when you when you're in the expansion boom phase and that will typically have Rising inflation above the two percent target and then in the contraction recession bust slump phase you tend to the central bank tend to cut rates right and that should typically align with Inflation coming down so deflation, you know going potentially below the 2% target and that aligns with also the contraction recession bust or slump phase, right? So it's it's really about the you know the bigger cycles, right now understanding this the Federal Reserve are Looking to actually be one of the central banks that are looking to cut rates Apparently first Which is which is strange, right? Because when you think about where we are on the Economic cycle for the Federal Reserve, sorry Federal Reserve, but just where we are on the economic cycle And you look at GDP being at about I think it's like 5.2% Yeah There's really no reason to Cut rates at the moment even though yes, we know that when you think about cycles You know, we've probably peaked in terms of the economic cycle and we're likely to go into the contraction recession phase But until we really go into the contraction recession phase and by the way recession is deemed as two negative quarters, right so two times You know minus growth, right some negative quarters of of Economic growth, so just put minus 0.1 for example of growth and you know or lower We are Nowhere near We are nowhere near in terms of you know the US GDP and I say we but the US are nowhere near two negative quarters of Of negative growth in fact Europe are Closer to a recession a technical recession and the likely to go into a recession in their next quarterly GDP reading which should be I think somewhere in This month January February, right and So why are the fed seen as the central bank that are likely to cut first rather than Europe? Right because inflation is coming down, you know across the globe But where Europe are they're closer to a recession. They're somewhere around here and you would probably say that the US is Somewhere around, you know the beginnings maybe of their contraction phase, right? So they're up here Europe are down here and so is something you know the UK as well, right? but they're also seen as hiking late or sorry cutting later than the Than the US. So again, the question is why is the Fed? cutting rates and it really comes down to what is known as the Political business cycle and something that is not really spoken about really the stars have kind of aligned in terms of The business political cycle. So what I'm gonna do is let me just clear this for now and then I'm gonna Go here and read this out just a couple of paragraphs, right? And so it says that the political business cycle in economics, right? Is the fluctuation of economic activity that results from an external intervention of Political actors the term political business cycle is used mainly to describe The stimulation of the economy just prior to an election in order to improve prospects of the incumbent government getting reelected despite numerous attempts to establish their existence Empirical evidence of political business cycles remains rather a equivocal and equivocal means Subjected to or more interpretations usually used to mislead or confuse or uncertain in and in as an indication or sign Or of uncertain nature or classification. So it's not necessarily a science, right? But I believe that it makes logical sense and I'm going to break this down as to why the the the central bank is going to Is going to try to Assist and even though they should remain neutral they're going to assist in helping to What's the word sorry the used to mainly describe stimulation of the economy, right? Why do I like to stimulate the economy by cutting rates, right? So cut by cutting rates You stimulate the economy and what stimulating the economy means Basically helping businesses, right and and people to put money in people's pockets And so whenever you Cut rates. Yeah, whenever you cut rates is important to understand this And the effect of cutting rates and hiking rates. So if you've got, you know interest rates and You're on, you know, wherever you are in the cycle Yeah, when you hike rates the effect of hiking rates is that you are raising borrowing and lending costs, right? and that affects businesses and You know mortgage owners, right? Because if you have a mortgage that and your interest rate and your repayment on your mortgage is going higher Then you're going to have less money in your pocket. Same thing if you have a business Instead of, you know, taking out, you know, expanding your business Thinking about expanding and maybe hiring more if you've got outstanding loans or you want to borrow more money It's going to be more expensive because the, you know, the central bank are hiking interest rates You want to think twice about either taking on new business or hiring more staff and expanding, right? So what that has the effect of is contracting the economy Yeah, and it's the opposite when you cut interest rates. So as interest rates are being cut What that does is that stimulates the economy because businesses Likely to borrow more, right? Because the repayments are lower and Hopefully if they are in any kind of trouble with eases, you know, financial trouble with eases You know the burden and they can, you know, basically, you know borrow money at a lower interest rate and and hopefully, you know, not Not collapse or, you know crumble or anything like that and in terms of helping, you know, the consumer and mortgage owners and homeowners it will Put money in their pocket by reducing the mortgage repayments, right? Depending on when your time is obviously due for remortgaging and so it's obviously critical to understand that and so if the central bank are Cutting interest rates, yeah and stimulating the economy prior to an election to improve the prospects of the incumbent government getting reelected. Yeah That makes all the sense in the world and as I said the stars have kind of aligned because Inflation at the moment is coming down, which get which, you know, typically You know would would be okay there would really be no reason for the central bank to cut rates because Inflation is pretty much now at their two percent target. So they would likely hold especially with the economy doing, you know So good at the moment But they're looking to cut quite Quite soon. So it says here expansionary monetary and fiscal policies have political politically popular Consequences in the short run such as falling unemployment Economic growth and benefits from government spending on public services. However, the same policy, especially if pursuit to excess I've found to have unpleasant consequences in the long term such as accelerating Inflation and damaging the foreign trade balance. So what that's basically saying is just You know expansionary monetary policy and fiscal policy in terms of, you know cutting rates can have If you cut rates, you can have an effect on the economy in the short run such as falling unemployment Right and economic growth as I explained before if you're a business and you've got You know lower rates to pay or your your loans or you can borrow money for cheaper Then you can afford to expand and hire people therefore Unemployment comes down and economic and that should boost economic growth But you can't do it too much in excess because what happens is if you make money too cheap and keep cutting then Inflation starts to come back and inflation is the devaluation of a currency. Yeah, and so that pretty much spells out why I believe that the the Federal Reserve are You know are likely I think very likely to want to Cut rates in the This year and it's not really to do with the fundamental side of things purely in terms of Looking at where you are in on the GDP cycle Because as I said, you was really kind of cut Rates if you were more heading into the recession phase like Europe and the UK But they're not they're really probably somewhere around this I wouldn't necessarily call it the boom phase, but they're coming down this this end of the cycle into the contraction And by the way cycles are pretty inevitable. Yeah, so, you know You might be thinking is there a chance that you could go into it from the contraction phase Back into the boom phase, etc. And and that is, you know possible but historically what you would normally have is is Is the cycle kind of follow through right so boom bust and then back to boom again, right like that and again if we look again, but if we look at The trading economics website and this is interest rates. This is interest rates For the US economy and you'll see it since 2000 last 25 years You'll see that interest rates when they start to come up Yeah, and then they hold rates and then you start to see the cycle right then they cut rates Yeah, nowhere really when they start cutting rates Do you start to see them then, you know high crates and cut rates and high crates and cut rates, right? Normally the cycle is once they start to begin Then that's the end of the cycle that they're on and then they start to you know Holds can be for a long time or can be for a shorter time, right? depending on what's happening with the economy and The and inflation right and then you have bottom end of the cycle and you to have the interest Then you have a hold for a period and then you have hikes Then you have a hold for a period and you have a cut then you have a hold for a period hikes Cuts then hikes and what should come next obviously, you know should come cuts and so the central banks are pretty much Be an inflation and now wouldn't I should hesitate to say beat an inflation, but inflation is coming down disinflation Is is is in the works and so with inflation coming back down to the 2% target You also have You know the the beginnings of the cycle now another question finally before I do go is Somebody probably look to say well, what if inflation? Yeah, what if inflation? Re-accelerates yeah, because you can have a situation where inflation, you know even though it's you know in the cycle It may actually start to You know re-accelerate a little bit and so that is obviously possible Yeah, in terms of you know if let's say for example the 2% target is here and let's say for example at you know to Maybe this is 2.7% let's say right and then maybe we get a reading where In a quarter or a month where it might go to maybe 3% is that possible? Of course, it's possible inflation isn't just going to drop like a stone It's inflation and GDP doesn't necessarily work like how interest rates work in terms of In terms of it being a smooth You know smooth sailing on the way down a smooth sailing on the way up as we've just seen the interest rate cycle and So the GDP cycle and inflation cycle kind of works if you're looking at it It probably might work a bit more like this where you might have Periods where you might have you know loads of numbers and then within those periods you may have You know a contraction side of things or in or GDP start to come down a bit the debt start to come down Then all of a sudden you might see something like this in my periods where GDP or inflation, you know start to go higher as it's coming lower and make higher lower highs lower lows And then you get this end of the cycle right and so within These periods right these periods here Yeah on the way down Inflation you could have a situation where inflation may actually tick higher, but overall you're looking at the Cycle right once it starts to make its way up and then starts to make it make its way down You're going to see periods where you might have in a Manifest is rising inflation actually fall for a month or two right or three, but ultimately this is how it looks in reality Yeah, and the same thing with GDP so from GDP Yeah, and Inflation the cycle tends to look something like this whereas the interest rate cycles Typically again historically at least over the last 25 years that is have tended to be a lot more smoother in terms of you know hiking and Cutting rates and so is there a chance that inflation could come in Yes, of course, it could go higher But doesn't mean that the central bank is going to change its mind and so if that does happen in the US This year where inflation starts to come higher a little bit. I don't think it will be enough for the central bank to want to You know Not cut rates for example, right? I think that they will continue to look to cut rates I think the only reason why They would probably pause or maybe hold or they could actually even re-accelerate there was a chance, right? if you know, there is there is a really major inflationary event and that inflationary event may come in the form of The Incidents that is happening in the I think it's the Red Sea where you have the I think it's they called the Houthi and They are Targeting certain tankers With regards to Israel and that could lead to shipping disruptions which then leads to supply issues Which then raises inflation. So there is that risk. Yeah, which could You know re-accelerate inflation globally And let's see how that actually develops But if there are no risk events like that or risk off events like that then or it doesn't necessarily, you know Come to pass or it, you know, they sort that out sooner rather than later Then you're likely to see inflation continue to probably fall and maybe to that 2% target And if that does start to happen then what the central bank are likely to do is start to cut rates Yeah, to stimulate the economy and even though we're at 5.2% Yeah you know if they can cut rates and let's say for example and re Ignite the economy as it starts to necessarily, you know contract might go down to maybe 3% and Then, you know, maybe goes to 2% as we head into the election But then as we start to head into the election and it cut rates Stimulate the economy and then, you know, people have recency bias The economy is growing this year and then we might head back up to four five six percent as we're growing because there are red cuts And then, you know, Joe Biden can actually say well look at what I've done Look at what we've done to the economy and he gets Re-elected so the political business cycle, you know, it's something that I believe Is a real possibility now will it play out this way? Who knows? I haven't got crystal ball, but it does look like at the moment This is playing out and this is you know, not necessarily being said directly by the banks But a lot of the banks are forecasting the central bank to actually cut rates and in fact if I go to The where is it now one second? The Fed watch tool Yeah, so this is the CME Fed watch tool and what we can see here are the probabilities of rate cuts as the market is pricing it in And in January, it looks like it says there is the 15% chance right now of a Cut because at the moment and let me just maybe make this Slightly bigger right so we can see that is squint There's a 15% chance of a rate cuts at the moment so you have at the moment the current base rate is 5.25 to 5.5 550 and the Chances of it, you know being cut is 15% now as we go towards March you'll start to see those probabilities Increased right now. We're looking at 73% chance of a cut In March and then in May it looks like the market is pricing in you know Pretty much a nice a nice cut Right here. Actually in fact, this is surprising They've actually priced in maybe a bit of a hike it depends so there's something to that but in You know in the main in March, which is you know the most recent data, they're actually pricing in The the chances of a rate cut I'm gonna have to look into you know why the market is pricing in actually at the moment rate hike in the In June that's very strange. Let's see June and Again, we look at June You know and we're seeing more cuts coming in to the market You know in ease pretty much is a hundred percent in June in July Again a hundred percent chance of an ease Yeah, so it's strange that the that the market in May is Is is saying that there's an eleven percent chance of of an ease and actually a twenty two percent chance of a hike and 66 percent 66 percent chance of no change. So that's a bit of a strange one, but Nevertheless, you're seeing most of the mumps looking like, you know cuts into The November elections, right? So you're seeing a hundred percent chance of cuts pretty much most of the mumps as we get closer towards the Elections and so that's really, you know, it's not me, you know Hypothesizing in terms of you know, my theory about things. This is what the market is currently Pricing in and it makes, you know, all the sense in the world In terms of just the political cycle normally you probably wouldn't have the central bank hiking Oh, sorry cutting first because where they are on their economic cycle is really good But because of the political business cycle, I believe that the federal reserve Although it's not said out loud. That's the reason why the market is pricing in Rate cuts and so let's see what happens if it plays out brilliant if it doesn't play out then You know, the risk is minimal really because you're not committing as much capital When you're when you're losing but you know, you're going for risk-a-war trades high risk-a-war trades And so if you're right about a trade brilliant you're going for maybe 10 15 20 to ones overall But if you're wrong about it, then You know, your risk is defined So it's not going to be that it's not going to blow your account, right? Or you shouldn't necessarily blow your account on on any one trade idea And this is just one trade idea that we have this year There were many more to come and many more that we're looking at as well in terms of you know, for example, you know Japan the Bank of Japan potentially hiking rates as well, which is another trade idea That I speak about in the private mentoring group. So I hope that explains things Bit of quite advanced fundamental analysis, but let's see how this plays out and if there are any changes then I guess the The mentoring if you're in a mentoring group, you'll definitely be kept up to date on any changes to this trade idea So I wish you all a very happy new year and I'll speak to you all soon. Take care