Why fundamental analysis is critical for FX traders
Posted by Formax Prime on 30 July 2018
The impact that economic data and breaking calendar news has on our FX markets, is undeniable and highly significant. The week ending June 15th and the Monday and Tuesday of the week beginning June 17th, provided perfect examples of how economic calendar releases and breaking news events, can move our markets.
In this article we’ll isolate a specific high impact calendar release and a breaking news event, in order to illustrate how both factors moved the FX markets. These examples perfectly illustrate how news releases are the primary stimulation for price action.
On June 14th at 9:30 am U.K. time, the U.K. ONS released the latest data concerning the country’s retail sector. The forecast was for a reading of 0.5% MoM growth for May, but the figure came in at 1.3% sales growth for the month, resulting in annual growth of 3.9%, with core sales coming in at 4.4% YoY. This result surprised market analysts and traders who had concerns that the U.K. economy was beginning to splutter and stall as a consequence of two main factors; Brexit and the lack of disposable income consumers had, given that annual wage growth was very close to CPI.
Sterling rose as the calendar event was published, the trading range and price action that GBP/USD displayed around the timing of the release was relatively modest and short lived, but the spike upwards provided an illustration of how an economic release can suddenly move our FX markets.
The second economic calendar event, that caused a significant reaction in the FX markets in the trading week ending June 15th, involved President Trump’s administration applying tariffs on $50B of imported Chinese goods. On Monday evening June 18th Trump then went a step further, by suggesting another $200B of China’s goods could be targeted. These threats had a dramatic impact on our FX markets, analysts and FX traders quickly deducing that inflation may spike in the USA, therefore interest rates may need to rise more quickly than the FOMC recently committed to, in order to contain domestic inflation.
Coming so soon after the Fed/FOMC has decoupled from the monetary policies of its central bank peers, the U.S. dollar rose significantly versus its main peers. We’ve also witnessed both Japanese yen and the Swiss Franc experiencing safe haven appeal over recent days, as both currencies are regarded as a possible storage of wealth during economic turmoil, and chaos can’t be ruled out, if these trade wars impact on world trade and cause global GDP to fall.
Technical analysis has its place in FX trading, combining technical analysis with fundamental analysis, whilst keeping abreast of developing macro economic events, combined with planning trades and trading the plan, could provide a solid foundation towards trading with more success.
However, experienced and successful traders know that FX price doesn’t move because two or three technical indicators combine to converge, price moves as a consequence of fundamental economic events and news, which is why traders should ensure they’re on message and ready to react throughout the trading day.