So basically, technical analysts use historical data to predict future currency moves. There are many different variations of how to analyse this historical data. To better understand technical analysis, we will start will the most basic principles, moving forward to the more complex.

Before we commence it is important to point out that technical analysis is based on three underlying principles:

Market action discounts everything
This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. The pure technical analyst is only concerned with price movements, not with the reasons for any changes.

Prices move in trends
Technical analysis is used to identify patterns of market behaviour which have long been recognised as significant. For many given patterns there is a high probability that they will produce the expected results. Also there are recognised patterns which repeat themselves on a consistent basis.

History repeats itself
Chart patterns have been recognised and categorised for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little with time.

Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued.

Technical analysis focuses on the study of price movements.

Commercial Banks
Banks are licensed deposit taking institutions, they also support a variety of other services including foreign exchange. These banks will trade currencies among themselves as part of the system of balancing accounts. While exchange rates for their largest customers are extremely competitive, small and medium sized enterprises and individuals will typically pay a large premium when transacting foreign exchange with their local branch. The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis.

Non Banking Corporations
This group comprises of companies who are involved in the ‘goods’ market, conducting international transactions for the purchase or sale of merchandise. Exporters are made up of a diverse range of companies exporting goods and services. Generally, exporters have a positive impact on the value of a country’s currency. Importers use the foreign exchange markets to purchase foreign currency to make payments for the goods and services they have bought in other countries. They generally have a negative impact on the value of a country’s currency. Their trade sizes are most often inconsequential to affect immediate moves in the market, given the large volume traded daily on the Forex market. However since a major key factor for long term trend of currency movements is the balance of trade, if taken as a whole the capital flows arising from these corporations end up having a significant impact.

Hedge Funds
Their influence has increased significantly in the last few years thanks to the overall growth in their industry and abundance of funds at their disposal; however the net effect of this group depends on the investment decisions they make. With the growth of the FX industry they have been, where possible, investing heavily in foreign securities and other foreign financial instruments.

Brokers
They can classified into Interbank and Client brokers with the influence of the former declining in the last few years due o the shift of businesses to electronic trading systems. The advent of online pricing systems has revolutionized the operational capabilities of this market and changed the traditional role of brokers. But even in the past, most banks were unable to service the needs of small to medium sized organizations as well as commercial & private clients with large corporations their main targeted market. Thus keeping in mind the client’s needs ability to invest a certain amount of minimum margin and still be able to trade on competitive spreads led to the advent of Online Broking Companies and ForexCT.com belongs to this group.

Investors/Speculators
Given that the Forex market has high liquidity, a large amount of leverage and the 24/7 operational nature of the market, it has been an attractive playing field for speculators. The service provided by speculators to a market is primarily that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs

For the foreign exchange operations most significant are repurchase agreements to sell the same security back at the same price at a predetermined date in the future (usually within 15 days), and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into the banking system. The impact on the foreign exchange market is that the national currency should weaken. The repurchase agreements may be either customer repos or system repos. Matched sale-purchase agreements are just the opposite of repurchase agreements. When executing a matched sale-purchase agreement, a bank or the FRS sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future (generally within 7 days). This arrangement amounts to a temporary drain of reserves. The impact on the foreign exchange market is that the national currency should strengthen.

Monetary operations include payments among central banks or to international agencies. In addition, the FRS has entered a series of currency swap arrangements with other central banks since 1962. Also, payments to the World Bank or the United Nations are executed through central banks.

Intervention in the United States foreign exchange markets by the U.S. Treasury and the FRS is geared toward restoring orderly conditions in the market or influencing the exchange rates. It is not geared toward affecting the reserves.

There are two types of foreign exchange interventions: naked intervention and sterilized Intervention. Naked intervention, or unsterilized intervention, refers to the sole foreign exchange activity. All that takes place is the intervention itself, in which the Federal Reserve either buys or sells U.S. dollars against a foreign currency. In addition to the impact on the foreign exchange market, there is also a monetary effect on the money supply. If the money supply is impacted, then consequent adjustments must be made in interest rates, in prices, and at all levels of the economy. Therefore, a naked foreign exchange intervention has a long-term effect.

Sterilized intervention neutralizes its impact on the money supply. As there are rather few central banks that want the impact of their intervention in the foreign exchange markets to affect all corners of their economy, sterilized interventions have been the tool of choice. This holds true for the FRS as well. The sterilized intervention involves an additional step to the original currency transaction. This step consists of a sale of government securities that offsets the reserve addition that occurs due to the intervention. It may be easier to visualize it if you think that the central bank will finance the sale of a currency through the sale of a number of government securities. Because a sterilized intervention only generates an impact on the supply and demand of a certain currency, its impact will tend to have a short-to medium-term effect.

Board of Governors of the Federal Reserve System

• Bank of England
• European Central Bank
• Bank of Japan
• Reserve Bank of Australia
• Swiss National Bank

This is the interest rate differential, a basic factor in the markets. Forex Traders react when the interest rate differential changes, not simply when the interest rates themselves change. For example, if all the G-5 countries decided to simultaneously lower their interest rates by 0.5 percent, the move would be neutral for foreign exchange, because the interest rate differentials would also be neutral. Of course, most of the time the discount rates are cut unilaterally, a move that generates changes in both the interest differential and the exchange rate. Forex Traders approach the interest rates like any other factor, trading on expectations and facts. For example, if rumor says that a discount rate will be cut, the respective currency will be sold before the fact. Once the cut occurs, it is quite possible that the currency will be bought back, or the other way around. An unexpected change in interest rates is likely to trigger a sharp currency move. Other factors affecting the trading decision are the time lag between the rumor and the fact, the reasons behind the interest rate change, and the perceived importance of the change. The market generally prices in a discount rate change that was delayed. Since it is a fait accompli, it is neutral to the market. If the discount rate was changed for political rather than economic reasons, a common practice in the European Monetary System, the markets are likely to go against the central banks, sticking to the real fundamentals rather than the political ones. This happened in both September 1992 and the summer of 1993, when the European central banks lost unprecedented amounts of money trying to prop up their currencies, despite having high interest rates. The market perceived those interest rates as artificially high and, 29 therefore, aggressively sold the respective currencies. Finally, Forex Traders deal on the perceived importance of a change in the interest rate differential.

The Australian dollar is currently the sixth-most-traded currency in world foreign exchange markets (behind the U.S. dollar, the euro, the yen, the Pound sterling, and the Swiss franc), accounting for approximately 4-5% of worldwide foreign exchange transactions. The Australian dollar is popular with currency traders due to the relative lack of government intervention in the foreign exchange market, the general stability of the economy and government as well as the prevailing view that it offers diversification benefits in a portfolio containing the major world currencies (especially because of its greater exposure to Asian economies and the commodities cycle).

History of the Australian Dollar

The Australian dollar was introduced on 14 February 1966, not only replacing the Australian pound (long since distinct from the pound sterling), but also introducing a decimal system.

In 1965 the Prime Minister at the time, Robert Menzies wished to name the currency “The Royal”, and other names such as “the Austral”, “The Oz”, “The Boomer”, “The Roo”, “The Kanga”, “The Emu”, “The Digger”, “The Kwid” and “Ming” (the nickname of Menzies) were also proposed. Due to Menzies’ influence, the name “Royal” was settled upon, and trial designs were prepared and printed by the printing works of the Reserve Bank of Australia. The unusual choice of name for the currency proved unpopular, and it was later shelved in favour of “dollar”.

On 14 February 1966 the Australian dollar was introduced at a rate of two dollars per pound, or ten shillings per dollar.

In 1967 the Australian dollar effectively left the sterling area for the first time. When sterling devalued in 1967 against the U.S. dollar, the new Australian dollar did not follow. It maintained its peg to the U.S. dollar at the same rate.

Value of the Australian dollar

In 2001, the value of one Australian dollar went below 50 US cents for the first time. As of January 2007, the Australian dollar was worth 77 US cents.

In 1966 when the Australian dollar was introduced, the International gold standard still operated. The Australian dollar was at that time worth 980 milligrams of gold. As of December 2006 the Australian dollar was worth 38 milligrams of gold.

Exchange rate policies

Australia maintained a peg to the British pound reflecting its historical ties as well as a view about the stability in value of the British pound. From 1946 to 1971 Australia maintained a peg to the U.S. dollar under the Bretton Woods system, but it was effectively pegged to sterling until 1967. With the breakdown of the Bretton Woods system in 1971, Australia converted the mostly-fixed peg to a moving peg against the U.S. dollar. In September 1974 Australia moved to a peg against a basket of currencies called the TWI (trade weighted index) in an effort to reduce fluctuations associated with its peg to the U.S. dollar. The peg to the TWI was changed to a moving peg in November 1976, causing the actual value of the peg to be periodically adjusted. In December 1983, the Australian Labor government led by Prime Minister Bob Hawke and Treasurer Paul Keating “floated” the Australian dollar. From that point, movements in the Australian dollar continued to reflect the strength of its terms of trade. For decades Australia’s reliance upon commodity (mineral and farm) exports has seen the Australian dollar rally during global booms, and fall when mineral prices slumped or when domestic spending overshadowed its export earnings outlook. The currency’s high volatility, currency exposure and interest swap has made the AUD one of the most traded currencies in the world, far in excess of the economy’s importance (2% of global economic activity).

The Swiss franc is the only version of the franc still issued in Europe. Its name in the four official languages of Switzerland is Franken (German), franc (French and Rhaeto-Romanic), and franco (Italian). The smaller denomination, which is worth a hundredth of a franc, is called Rappen (Rp.) in German, centime (c.) in French, centesimo (ct.) in Italian and rap (rp.) in Rhaeto-Romanic. Users of the currency commonly write CHF (the ISO code), though SFr. is still common. SwF has been used in some publications but is not an official abbreviation.

The current franc was introduced in 1850 at par with the French franc. It replaced the different currencies of the Swiss cantons, some of which had been using a franc (divided into 10 batzen and 100 rappen) which was worth 1½ French francs.

In 1865, France, Belgium, Italy, and Switzerland formed the Latin Monetary Union where they agreed to change their national currencies to a standard of 4.5 grams of silver or 0.290322 grams of gold. Even after the monetary union faded away in the 1920s and officially ended in 1927, the Swiss franc remained on that standard until 1967.

As of November 30, 2006, the Swiss franc was worth US$ 0.826729 or € 0.628625. Since mid-2003, its exchange rate with the Euro has been stable at a value of about 1.55 CHF per Euro, so that the Swiss Franc has risen and fallen in tandem with the Euro against the U.S. dollar and other currencies.

The Swiss franc has historically been considered a safe haven currency with virtually zero inflation and a legal requirement that a minimum 40% is backed by gold reserves. However this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following an amendment to the Swiss Constitution. The Swiss franc has suffered devaluation only once, on 27 September 1936 during the Great Depression, when the currency was devalued by 30% following the devaluations of the British pound, U.S. dollar and French franc.

The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown Dependencies. The slang term “quid” is very common in the UK.

The official full name pound sterling (plural: pounds sterling) is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name. The Sterling is the third most traded currency in the world, after the US dollar and the euro.

History of the Great British Pound

The Gold Standard

Sterling unofficially moved to the gold standard from silver thanks to an overvaluation of gold in England that drew gold from abroad and occasioned a steady export of silver coin, in spite of a re-evaluation of gold in 1717 by Sir Isaac Newton, Master of the Royal Mint. The de facto gold standard continued until its official adoption following the end of the Napoleonic Wars, in 1816 (Braudel, p. 361). This lasted until the United Kingdom, in common with many other countries, abandoned the standard after World War I in 1919. During this period, one pound could be exchanged for US$4.87.

Discussions took place following the 1865 International Monetary Conference in Paris concerning the possibility of the UK joining the Latin Monetary Union, and a Royal Commission on International Coinage examined the issues. Although the UK decided against joining, some of the arguments make interesting reading in the context of the current debate on the adoption of the euro.

Prior to World War I, the United Kingdom had one of the world’s strongest economies, holding 40% of the world’s overseas investments. However, by the end of the war the country owed £850 million, mostly to the United States, with interest costing the country some 40% of all government spending.

In an attempt to resume stability, a variation on the gold standard was reintroduced in 1925, under which the currency was pegged to the gold price at pre-war levels, although people were only able to exchange their currency for gold bullion, rather than for coins. This was abandoned on 21 September 1931, during the Great Depression, and sterling devalued 20%.

In common with all other world currencies, there is no longer any link to precious metals. The U.S. dollar was the last to leave gold, in 1971. The pound was made fully convertible in 1946 as a condition for receiving a U.S. loan of US$3.75 billion in the aftermath of World War II.

Pound sterling was used as the currency of many parts of the British Empire. As this became the Commonwealth of Nations, commonwealth countries introduced their own currencies such as the Australian pound and Irish pound. This evolved into the Sterling Area where those currencies were pegged to sterling.

Following the U.S. dollar

Since leaving gold, there have been several attempts to peg the value of the pound to other currencies, initially the U.S. dollar.

Under continuing economic pressure, and despite months of denials that it would do so, on 19 September 1949, the government devalued the pound by 30%, from US$4.03 to US$2.80. The move prompted several other governments to devalue against the dollar too, including Australia, Denmark, Ireland, Egypt, India, Israel, New Zealand, Norway and South Africa.

In the mid-1960s the pound came under renewed pressure since the exchange rate against the dollar was considered too high. In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1970. The pound was eventually devalued by 14.3% to US$2.41 on 18 November 1967.

With the break down of the Bretton Woods system – not least because mainly British currency dealers had created a substantial Eurodollar market which made the U.S. dollar’s gold standard harder for its government to maintain – the pound was floated in the early 1970s and so subject to a market appreciation. The Sterling Area effectively ended at this time when the majority of its members also chose to float freely against the pound and the dollar.

A further crisis followed in 1976, when it was apparently leaked that the International Monetary Fund (IMF) thought that the pound should be set at US$1.50, and as a result the pound fell to $1.57, and the government decided it had to borrow £2.3 billion from the IMF. In the early 1980s the pound moved above the $2 level as interest rates rose in response to the monetarist policy of targeting money supply and a high exchange rate was widely blamed for the deep recession of 1981. At its lowest, the pound stood at just US$1.05 in February 1985, before returning to US$1.77 during the 1990s.

There are often long periods where the pound and the euro move in sync, although since the middle of 2006 this correlation has weakened. Inflation concerns in the U.K. led the Bank of England (BoE) to hike interest rates twice unexpectedly in late 2006 and early 2007, causing sterling to rise to its highest rate against the euro since January 2003. This had a knock on effect versus other major currencies, and the pound hit a 15 year high against the US dollar on January 23, 2007, peaking at US$1.9916 per pound.

Following the German mark

In 1988, Margaret Thatcher’s Chancellor of the Exchequer Nigel Lawson decided that the pound should “shadow” the West German Deutsche Mark, with the unintended result of a rapid rise in inflation as the economy boomed due to inappropriately low interest rates. (For ideological reasons, the Conservative Government declined to use alternative mechanisms to control the explosion of credit. Former Prime Minister Ted Heath referred to Lawson as a “one club golfer”.)

Following the European currency unit

In another change of tack, on 8 October 1990 the Thatcher government decided to join the European Exchange Rate Mechanism (ERM), with the pound set at DM2.95. However, the country was forced to withdraw from the system on Black Wednesday (September 16, 1992) as Britain’s economic performance made the exchange rate unsustainable. Speculator George Soros famously made approximately US$1 billion from shorting the pound.

Black Wednesday saw interest rates jump from 10%, to 12%, and then finally to 15% in a futile attempt to stop the pound from falling below the ERM limits. The exchange rate fell to DM2.20. Proponents of a lower GBP/DM exchange rate were vindicated as the cheaper pound encouraged exports and contributed to the economic prosperity of the 1990s. Since early 2005, the £/€ rate has returned to an average of about £1.00:€1.46, which is equivalent to DM2.85.

Bank Negara Malaysia is reported to have suffered losses of more than US$4 billion from the pound devaluation.

Following inflation targets

In 1997, the newly-elected Labour government made a surprising move when Gordon Brown handed over day-to-day control of interest rates to the Bank of England (a policy that had initially been proposed by the Liberal Democrats). The Bank is now responsible for setting its base rate of interest so as to keep inflation very close to 2%. Should inflation be more than 1% above or below the target, the governor of the Bank of England is required to write a letter to the Chancellor of the Exchequer explaining the reasons for this and the measures which will be taken to bring inflation back in line with the 2% target.

The Euro

As a member of the European Union, the United Kingdom has the option of adopting the euro as its currency. However, the subject remains politically controversial, not least since the United Kingdom was forced to withdraw from its precursor, the European Exchange Rate Mechanism. The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created.

Denmark and the UK have a unique opt-out from entry to the euro. Technically, every other EU nation must eventually sign up; however, this can be delayed indefinitely (as in the case of Sweden) by refusing to join ERM II.

The idea of replacing the pound with the euro has been controversial with some sectors of the British public because of its identity as a symbol of British nationalism

In Scotland there is additional concern that the adoption of the euro would mean the end of regionally distinctive banknotes, as the European Central Bank do not permit national or sub-national designs of the banknotes.