You know me mostly as a technical trader (though, I’d prefer to claim myself a “conditional trader”). Does it mean that I pay no attention to fundamentals whatsoever? Actually, no. In this article, I want to pay attention exclusively to some fundamentals of currency markets. Of course, I do it in an unconventional way.
There are two ways to read fundamental information: the difficult one and the simple one (don’t mix this word with “easy”). In this article, I will describe both approaches and focus on the “simple” one.
The difficult way:
The difficult way is to try to understand all the relationships between macroeconomic indicators and price trends. Can you even imagine how complex this domain is? There are very few people who can really figure out what is happening with the global macro context.
Also, take a note that there many analysts from different banks and hedge funds with sometimes the opposite views on the subject. In a long-term period, fundamentals drive the market. If you read and interpret them correctly, you may ride those trends (identifying entry points with the help of chart patterns and technical analysis)
For a trader, like you and me, there should be a simpler way.
The “simple” way:
The way that I call “simple” is dealing not with the real fundamentals, but with the “perception of the market”. It is called “market sentiment”. In other words, you have to know how traders see the situation, what bets do they do. This alone can give you more advantage for a short-term trading.
What is market sentiment and how to read that
If you see a consistently bullish reaction to a relatively neutral key information (and even negative), you are more than likely observing positive sentiment for the asset you trade. Vice versa, if the sentiment is negative, the market will tend to react negatively to key information.
What is key information for the Forex market
If we take, for example, Forex market, it is driven by expectations of changes in interest rates decisions. Really, it’s not real interest rate hike that drives the markets, it’s an expectation. When the fact is visible to the public, there’s no uncertainty, and thus, no reason for speculation.
That’s why, those expectations are discounted in the price of EURUSD, GBPUSD (and other currency pairs) long before the interest rate decision is known.
Key news and economic releases
If you, once in a while, bother reading FOMC statement, you may notice, that they speak mostly about perspectives of “labor market” and “inflation estimates”. Translated to a normal people’s language, we get two major drivers for FX markets: employment and inflation reports.
The major employment report is known as a “non-farm payrolls” (published in the first week of the month). The second important set of news is published during the second week of the month – this week, by the way.
It’s a “Consumer price index” report and “Retail sales” (for example, for the US dollar).
What to monitor during this week: homework
Take a note: how the price of major currency pairs will react on Wednesday (CPI for the United States) and Friday (Retail sales in the United States). Will you notice any tendency of EURUSD, GBPUSD (and other major currency pairs) to react in a similar manner?
In case, you’ll notice some negative or positive behavior of the market after the releases, it may be an indication of a certain market sentiment.
To be continued…