 Hi, my name's Leo. I'm a currency trader and trading coach at trading 180.com and in this video I'm going to be going over the pound yen second quarter review. Why did this pair trend? 1,935 pips and so A lot of traders will You know claim that the reason why I did was due to some sort of technical analysis some sort of Elliot wave Indicator, etc. It's that's all nonsense, right? Doesn't matter what your swing trading technical strategy is or any technical strategy that you have an employee in the markets It's the fundamental and risk sentiment analysis decisions by institutions That is the determining factor of large price movements You need to know what the driving force and why institutions are buying and selling and then the ones that are creating the price action That we trade and so if they're creating a price action, then they're not looking always 100% at the price action There are things going on outside of the technicals a lot of times And all of the time matter of fact that will determine whether currency will go higher in the future or lower or just stay within a Certain range and those things in forex come down to Interest rates GDP and inflation and really, you know the forex fundamentals the basics, right? And so If you haven't watched my previous video on the euro dollar Q1 review, right out of where I explain this exact same thing You can watch that if you haven't watched it anyway Definitely watch it. But this is just going to be a quick overview Of in case you're new to, you know forex fundamentals of what you really should be looking at From a real kind of basic perspective. So gross domestic product of a country, right? When you had when you have growth, you typically that typically leads to currency Appreciation and if you have a contraction or recession that leads to currency devaluation or depreciation, yeah And number two is going to be inflation, right? And so you need to first of all have GDP if you're looking to buy have GDP on your side or against you whether you want to go Along with short and then you also need to look at inflation and inflation as a 2% central bank target and central banks are mandated to Achieve this 2% inflation target by either hiking holding or cutting interest rates now Inflation from a very basic perspective You know where we're looking at the 2% mandate, right? And so inflation is actually currency devaluation so the central bank target at 2% is saying that they are Willing to let inflation devalue every year at 2% and that's fine And that is an acceptable currency devaluation, yeah Now if inflation starts to starts to rise above the 2% target then that is unacceptable currency devaluation and if inflation starts to go below 2% and Goes into the negative that in fact is unacceptable currency appreciation, yeah, so rising inflation is currency devaluation and in fact Anything below 2% which would be considered Deflation is actually currency Appreciation now to can do what a counteract currency appreciation or unacceptable currency devaluation and appreciation central banks either hold rates interest rates they hike interest rates or they cut interest rates and so when the inflation when inflation is at an acceptable currency Devaluation level at 2% they will typically hold rates If inflation starts to rise above Their 2% target and is continuing to rise above their 2% target They need to get inflation back down to the 2% target, which means that they are likely to Hike rates, yeah So if the inflation is above 2% that equals a hike and that leads to currency Appreciation to counter the currency Devaluation and if current if the currency and inflation sorry is below the 2% that is unacceptable currency Appreciation and so what central banks will do is actually cut rates right to Depreciate the currency to counter currency Appreciation so it's it's like a balance balancing act Is what central banks are doing and as of note? It's worth noting that hiking too much Causes economic contraction simply because on a basic level hyping interest rates Is basically hiking borrowing and lending costs, right? If you if you're a business or you're a homeowner You know that you know your your mortgage and when the central bank hikes interest rates You've got to pay more on your mortgage or if you're in a business on any loans that you've taken out and so You have less money in your pocket. If you know your your outgoings are rising. Yeah, so From that perspective that has a knock-on effect with spending in the economy and can contract the economy and so It's very important also to understand that in currency land and I guess in in any type of trading or investing You're looking to buy the rumor sell the fact so you're looking to buy low sell high and how do you know whether? You know a currency exchange rate is low or any kind of you know stock investment or property investment is high or low You need to understand the fundamentals first of all to then get a certain valuation and also anticipate what may be coming in the future to Decide whether prices are likely to go higher or lower, right? And again in in currencies We do that by anticipating what the central bank is likely to do with interest rates by watching inflation and GDP and so Let's look at the central bank policy Differentials for the pound yen in the second quarter of 2023 and so second quarter starts from April and the quarter is April May and June and so What we're looking for is really divergencies in currencies, right? So we need to look at again from a really kind of basic level is looking at what central banks are trying to do with Their interest rates right because if we go back in fact if a central bank is hiking rates What are they looking to do? They're looking to appreciate their currency Yeah, and if a central bank is looking to cut rates, they're looking to devalue and depreciate their currency And if they're looking to Hold rates then in looking to do anything with their currency, right? They're looking there They're happy or satisfied with you know the currency valuation and so We're looking at the pound right so the pound versus the yen and so looking strictly from a central bank currency Interest rate Hiking or holding or cutting Policy we can then determine the strength of one currency versus another so with the pound the pound It this was from an article from Bloomberg and it said the UK business leaders expect one more interest rate Rise or a hike amid signs that they believe inflation is stabilizing at elevated levels According to a survey that forms a key part of the Bank of England's policy discussion So on one hand you have a central bank that is looking to hike rates Yep, so rates potentially hiking one more time now in Japan you have the bank of in you have the Bank of Japan maintained its rock bottom interest rates and asset purchase settings at the end of two-day gathering Friday as Expected by almost 90% of economists surveyed by Bloomberg and so they are Maintaining their rock bottom interest rate Which is basically zero point minus zero point one percent right and so you have one central bank that is hiking one central bank that is Looking to hold now Ueda who is the governor of the Bank of Japan was sworn in I guess if you want to say sworn in or he was elected and he was actually quite dovish when it came to A Monetary policy now there was before this into March. There was some speculation that they Bank of Japan could have adjusted Their monetary policy to the point where it would have the effect of appreciating their currency This was yield curve control YCC But they elected in fact or Ueda elected to actually keep rates on hold So we had one central bank that was hiking rates any other that was looking to hold rates and so What happened on the charts during April going to the charts and zoom in a little bit and Again, just to kind of point out I guess on the chart that price has moved 1300 1,935 pips this was the low in April Yeah, low in April to the current high I'm recording this on Monday the sorry Tuesday the 20th of of june and The high at the moment was 1,935 pips But focusing on We're looking at April month of April one central bank Which is the pound hiking rates and the Japanese yen bank of japan not looking to hike rates That was going to be the or should have been the expected Price action, right pound increasing in strength the yen You know not doing anything and so you would expect prices to Trend which they did so We found out what happened in a month of April now going to may right and the bank of england Monetary money markets have shifted quickly in the uk investors are fully priced in a quarter point in just rate increase this month and are wagering the bank will In continued climbing to above 4.9 percent in september even then traders were betting on a terminal rate above 5% and so in may Again, when we talk about buying the rumor buying the rumor meaning what is the central bank likely to do in the future Investors were saying that they are likely to continue to hike rates and even you know hike rates a lot higher, right? Then it was currently in may and so that was being priced in so again central bank The bank of england still continuing to hike rates yeah and the bank of japan Looking at the bank of japan governor ueda Indicated his desire to hold onto policy flexibility by playing down the importance of wages or any single economic data Set as a trigger for change So he was kind of downplaying any kind of inflation moves As though he didn't really necessarily think they were important to start to hike rates It says the governor indicated that he sees no immediate need to join the global wave of inflation fighting inflation fighting means If inflation goes higher then they have to obviously hike rates, right? And he said there's no need for that saying that the higher cost of living is still being led by cost push factors and so Pretty much he was remaining dovish. He was still holding rates So you had one central bank hiking one central bank holding just like we did the previous month And so what should that mean on a price chart? So what happened during may may we had pretty much the same thing, right? We got a bit of a pullback anybody who was looking for a bit more of a bargain price Um got one, you know in may around these areas here and prices continued to trend It's a no-brainer, right? now going to The final quarter the final month of the quarter the pound yen in june So bank of england governor andrew bailey warned that inflation in the uk is sticky and taking longer to come down After shock data that fueled bets on higher interest rates. So The bank of england and the uk had really high inflation still do in in comparison to europe and the us and because of that The market was pricing in more rate hikes because We understand if you're a fundamental analysis trader when you understand the basics that high inflation will lead to a central bank Looking to continue to hike rates, right? So once again, we had a central bank. That is hiking rates Yeah, the bank bank of england at the bank of japan You know, uh officials see little need to adjust its yield curve control program and you can just yield curve control If they adjusted it, it would mean in fact, it's a way of Central banks to appreciate their currency So they see little need to do that at the at a policy meeting meeting next week Given the improvement in the functioning of the bond market and the smooth shape of the yield curve According to people familiar with the matter. So the rumor was that the bank of japan will continue to pretty much Stay stand pat or you know, stay on hold and not adjust monetary policy to Look to appreciate their currency. Yeah And so again, what happened in june? You guessed it. You guessed it. We had even more Even higher move, right? and so For the whole quarter. This is we're looking at purely Interest rate divergences in terms of what central banks were doing with interest rates um, this was uh Predictable, right or and I'm I want to use um, you know It's a 100 guarantee because there are other things Involved in the valuation of a currency, but interest rate divergence is uh, one of one of the most important Factors in understanding Where prices may likely go in the future. So when we look at the Pound gen, you know q2 fundamental review and we look at gdp for example Gdp. So the left axis is for For the pound and the right is for the yen and what we saw in the last couple of quarters was that the The uk economy pretty much grew 0.1 percent kind of flatlined over the last two quarters in january and April but it was expected in fact to go into a recession last year So in fact the fact that it didn't never it didn't go into a recession And maintained its positive even though It's very small, but positive growth. They were seen as actually a positive for the for the uk and similar GDP growth in japan where you had negative growth last year and then you started to have GDP kind of rise above that zero Growth which is if you have two negative quarters that means a recession And then you also have the you know the end growing currently at 0.5 percent So pretty much a bit better than the uk at the moment, but um You know over the past the quarter both central banks also both both economies weren't going into a recession But what is what was really important to central bank policy was The fact that you had uk inflation and on the left hand side Um going into you know, eight um february march and april you have Inflation at around that nine nine point point five ten percent from february march into april right So it's gone down a bit eight point five percent Whereas when you look at japanese inflation currently over the last, you know a couple of uh months You've had inflation really at three percent three point five percent So you've had higher inflation in the uk Which means that the central bank bank of england have to be more aggressive in their hiking Right and which which which they were which is the reason why you saw a currency appreciation And that's shown in the uk interest rates. You can see um interest rates from august last year Rising continuing to rise and then you have the japanese interest rate the bank of japan kept their interest rates on Hole and so that divergence between central banks and their monetary policies Especially over the last quarter You know is the result of what we see Here on a price chart And so um going to The notes and things that you must be aware of is risk on a risk of sentiment During that time there was a credit crunch fears due to bank failures and the japanese yen typically and historically does react to risk off events although In the last quarter it really hasn't it's not a guarantee that it will the market was more focused on You know the return that they you know may get From putting their money into a higher yielding currency than they were about the banking crisis And so in this scenario in the last quarter scenario The risk off flows and safe haven flows didn't necessarily go into the yen And so um although it does look you know like a Brilliant chart in terms of you know nice and easy. It wouldn't it wouldn't have been necessarily easy to hold on to that trade You know all the way and capture you know 1935 pips right but if you had um, you know You know got in and out and just had a simple direction Um of travel you could have captured um a decent amount also as well the carry trade so the carry trade Is where um you or traders take advantage of the difference in interest rates between Two economies to borrow where the rate is low and invest where the rate is high And so you can see on this chart that the yen is the only negative yielding currency So what traders are doing is they're borrowing actually at negative Rates and investing and putting their money into higher yielding currencies like the new zealand dollar The u.s. Dollar the pound right and so if you're borrowing for pretty much, you know zero right But you're investing in a currency Creating demand for that currency at a higher rate. They're making the difference between the two and so that's going to create demand Or less them or less demand for the Japanese yen and actually Increase demand more demand for those higher yielding currencies And so that has also weighed on The the yen And continues to wait on the yen until the bank of japan actually decide that they may want to adjust your curve control Which giving you the heads up. It looks like they are looking to do sometime this year Rumors are it could be from, you know, july august september um but again It's the rumor and Uh, let's see what happens with that So data must support the narrative and so there's no point in buying the pound If for example inflation is coming down to their two percent target because the central bank is likely to end up holding rates Um as inflation starts to come, you know down So if you're looking to buy any not just the pound but any uh currency Looking at inflation in gdp is important and that data must support the narrative if you're in a trade You can basically Get in and out of trades or look to take profit Or hold on for longer depending on whether the data is supporting your trade So if data doesn't support your trade Then you can look to take profit if the data is still supporting your trading you can look to continue to hold Um Trade probably be trading probabilities. There are no certainties, right? And so You know, there are other factors that do drive the valuation of currencies. It's not just interest rates There are risk sentiment Factors and some other factors as well that do from time to time Dictate the valuation of a currency But we're trading in probabilities So you may have a time where a central bank might be hiking rates But in fact prices may go down. There are times where that happens Let's be on the scope of this video as to the reasons why But ultimately Look to trade the probabilities manage your risk and understand that there are no Certainties in trading and think macro. So basically think of the higher time frames um Daily weekly time frames when looking at um, you know your trade You can obviously go down into the lower time frames to enter and try to get um, you know A really nice risk reward trade, but ultimately think uh and always observe what price is doing Um, especially when you're looking for pullbacks To buy on a daily time frame or weekly time frame chart And it will always be a pullback, right? It's always going to be an opportunity. So don't filmo into into into trades on a lower time frame because a lot of traders end up being caught out on the wrong side Of the market buying at highs. Remember you want to buy low sell high? And there's always going to be an opportunity to do that um with fundamentals directional buyers doesn't really change too often, you know, um, once you have a directional fundamental bias, um, they can last a trade idea can last for You know, you've seen this one last for a whole quarter, right three months If all you were doing was buying a pound yen, then now, you know, that that would have been it, right? You don't need to necessarily always keep switching from This currency to that currency and trade ideas can last for months and even years I had a trade idea that lasted for maybe about maybe two years. It was the euro dollar back in maybe 2019 2020 something like that When I was just shorting the the euro dollar for yeah, maybe about 18 to 20 months So, uh directional buyers doesn't change often. It's not a week to week thing For example, what am I buying? Am I buying a pound this week? Am I selling a pound this week? No, no, no You can just continue to buy the pound and wait for pullbacks and wait for better prices in order to get, you know, long on the pound You know, if you if you think that, you know, the data is still going to continue to support the narrative Personally, I think it's actually coming to a bit of an end. But again, that's beyond the scope of this video and finally If you have, uh, maybe any quarter of the three Forex pair suggestions you want me to analyze, um, you know, put it in the Description box below in the comments. I'd love to get your feedback on the video and, um, yeah, the I guess the pair with the most, um, recommendations is the one that I will, um, do for the cute three And so finally mentoring is available for a short time only Um, it's currently the 20th of june 2023. I'm closing my mentoring. I think it's on the on friday The 23rd of june. So you have a few days left if you do want to be mentored by me Really apply, uh, the fundamentals and learn how to apply the fundamentals to your technical analysis trading Um, and access the private discord community as well as fundamental the fundamental analysis spreadsheet videos tutorials Um, and a whole lot more, um, you know, live group calls every wednesday Then go to trading 180.com and sign up. Um, if not, I hope you enjoyed the video Um, and I hope you get some really good value from this video And it really kind of sets you on at least the path to incorporate fundamental analysis into your Trading so that you can get some better trade results. All right. Take care and uh, speak to you all soon