Trading Using Fundamental Analysis

Especially the one that gives an idea about what a central bank might do next.


Fundamental analysis of central banks is often a process of poring through statements and speeches by central bankers along with attempting to think like them to predict their next move. Trading economic releases can be a very tenuous and unpredictable challenge. Many of the greatest minds at the major investment banks around the world have a difficult time predicting exactly what an economic release will ultimately end up being.

They have models that take many different aspects into account, but can still be embarrassingly wrong in their predictions; hence the reason that markets move so violently after important economic releases. If the consensus fails to predict the final result, the market then usually moves in the direction of the actual result — meaning that if it was better than consensus, a positive reaction unfolds and vice versa for a less-than-consensus result.

The trick to trading the fundamental aspect of economic releases is to determine when you want to make your commitment. Do you trade before or after the figure is released?

Both have their merits and their detractions. If you trade well before the release, you can try to take advantage of the flow toward the consensus expectation, but other fundamental events around the world can impact the market more than the consensus read.

Trading moments before the economic release means that you have an opinion on whether the actual release will be better or worse than the consensus, but you could be dreadfully wrong and risk large losses on essentially a coin flip. Trading moments after the economic release means that you will be trying to establish a position in a low-volume market which presents the challenge of getting your desired price. These tensions or conflicts can have an adverse impact on tradable goods by changing the supply or even the demand for certain products.

For instance, increased conflict in the Middle East can put a strain on the supply of oil which then makes the price increase. Being able to properly predict how these events will conclude may be a way to get ahead of the market with your fundamental perspective. For instance, at the end of the calendar year many investors will sell equities that have declined throughout the year in order to claim capital losses on their taxes.

The economic news influences markets throughout the trading day and week, and even over the weekend. Such events may be Chinese data typically comes out on Sundays or economic summits, etc.

Even political and geopolitical events, like referendums and G20, etc. The typical structure of any Forex market calendar looks like the one above. From left to right, the data to consider is the:. This one shows what every piece of economic data means and why it is important as a Forex economic calendar indicator.

The red color signals an economic event at Trade Balance is the name, and the forecasted value is CAD0. It represents the difference in value between imported and exported goods during the reported month. Hence, the bigger the data, the better for the currency. The frequency, historical data, the next release data and other details give the overall picture of the news.

Such information exists for any news part of the fundamental analysis of Forex market. Not all data in the economic calendar matters, though. Traders focus on having an educated guess about what the central bank will do next. Central banks meet regularly every month or every six weeks to set the interest rate on currency. Together with the interest rate, the overall monetary policy moves the Forex market. Trading is a game of probabilities. And in most of the times the market moves based on future expectations rather than the actual news.

Between two central bank meetings, traders buy or sell currencies on future monetary policy expectations. Anything else is secondary. The red economic events are the ones that move the market. The rest of the data is secondary in importance. Above is the important fundamental analysis of Forex market. Traders focus on the red events and on what they tell about future monetary policy.

What a central bank does with the interest rate on a respective currency is vital for that currency. All of them have a mandate and set the monetary policy based on it. The pillar of their mandate is inflation. A classical mandate sounds like this: However, there is one central bank that has a dual mandate: The Federal Reserve of the United States. It is no wonder now why the jobs data in the United States, namely the NFP number is crucial for the dollar.

Knowing what data follows is a great advantage ahead of the market. The problem is that everyone looks at the same data. Yet, not everyone makes money in the Forex market. One way to succeed is to use the FX trading calendar correctly. Keep in mind that fundamental analysis in Forex trading is as important as technical analysis. Everyone knows these days that the ECB has a problem with inflation in the Eurozone.

More exactly, with the lack of it. In this relation, levels of 1. Higher inflation levels lead to the central bank raising rates. Contrary, lower inflation results in the central bank cutting rates.

Higher rates mean a higher currency, while lower rates are bearish for a currency. It is clear now why inflation is so important for the central banks. Hence, it is one of the most important Forex fundamental analysis indicators. The end of October saw the inflation in the Eurozone unexpectedly falling.

As per the economic calendar, the expected or forecasted value was 1. However, the actual number came at 0. Before moving forward, please refer to the mandate of a central bank: Hence, market participants started to sell the Euro in a frenzy. Because part of the fundamental analysis of Forex market is to trade expectations. In this case, based on the inflation data, expectations grew that the central bank will cut rates at the next meeting. Cutting rates are bearish for a currency and sellers step in.

So they did, as the chart above shows. The next ECB meeting was after two weeks and traders sold the Euro on rate cut speculations.

This is how the economic calendar Forex influences trading decisions. For the next two weeks, all Euro pairs suffered across the dashboard. No other news part of any economic calendars mattered anymore. The ECB did deliver. However, the lows in that day turned out to be the lows for a long period ahead.

The explanation comes from the press conference. A press conference follows forty-five minutes after every ECB meeting. The President reads the statement, and press representatives ask questions. However, he added that the ECB expects inflation to pick up next year. Because of that message, traders focused, yet again, on expectations.

So, bullish for the U. Traders simply disregarded the data and before you know the pre-ECB highs disappeared. So powerful the fundamental analysis in Forex is.