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Tuesday June 8, 2021 - 12:49:37 GMT
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Do Fundamentals Matter Driving Forex Trends?

Trends in the forex market tend to be strongest when fundamentals support technical moves.. Many retail forex traders dismiss the fundamentals when trading because they are sometimes hard to figure out and because they are not easily converted into a trading strategy. Nevertheless, they are often the major driver of broader trends and regularly impact price levels on a daily basis. 

Why Fundamentals Matter

What matters most to professional traders is the sustainable relative economic growth of the economy backing a currency. In this regard, the fundamentals are simple because basic economic trends are slow to change. Professional traders can get very deep in the weeds at times trying to look at every data release to get a jump on indicators that might be signaling a change in those basic trends, but as often as not they can get too far ahead of the markets. This is an approach to trading that I do not recommend.   

Forex Market Interest Rate Driven

Trends in the forex market tend to occur when economies are out of sync. What I mean by this is when economic growth/prospects diverge (i.e. one economy is growing while another is either lagging or contracting), trends start to build. One reason is that foreign exchange is all about the value of one currency against another, and the cost (or return) on a given currency is its interest rate. Traditionally, forex values have been driven by relative interest rates. The theory is that central banks will respond to stronger growth/inflation risk by tightening monetary policy, supporting those currencies vs. those where growth is weaker or lagging as interest rate differentials widen..

But hold on…

What complicates the current efforts to build strong trends is that economies are currently in sync, at least for expectations that growth will improve in the post-pandemic period as more people in industrialized countries get vaccinated and restrictions are lifted. One reason why markets are trading more on expectations than current relative growth differentials is that most central banks, led by the Fed, have made it clear that there is no rush to tighten monetary policy in response to rising inflationary pressures which they see as transitory (see A Big Fib).

So far, attempts to force the Fed’s hand by pushing bond yields higher have failed as that market has seen rates back off into ranges, supporting risk assets and keeping a lid on the dollar. Note, central banks prefer to telegraph their future policy moves rather than spring a surprise so financial markets can adjust well in advance. In this way, when an official rate change is announced, the policy statement often only ratifies what has already been priced in.

Do fundamentals matter?

So do fundaments matter currently in driving forex trends? To sum up, these are not normal times where markets would by now anticipating central bank changes in monetary policy based on fundamentals. The pandemic has distorted the typical business cycle and move out of it has major economies moving in the same direction.  However, central banks are in no rush to remove the liquidity punch bowl, leaving those looking to trade on traditional fundamentals wary of getting too far ahead of themselves as the flood of liquidity continues to slosh around global markets.

As I wrote on the Forex Forum in a market that seems to be biding its time trading in relatively tight ranges. ,

GVI Forex 11:11 GMT 06/08/2021  - My Profile
Complacency can be a trader’s worst enemy. The time to be most alert is when markets are stuck in doldrums like now as you never know when they will breakout.

I can only suggest a way to get ahead of the curve and let the

The Amazing Trader and its Strategies be your trading guide

Feel free to contact me with any questions or comments.

Jay Meisler, co=founder

Global-View.com’[email protected]


 

 

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Actionable trading levels delivered LIVE to YOUR charts

GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Mon 27 May 2019
AAGB/US- Holiday
Tue 28 May 2019
A 14:00 US- Consumer Confidence
C 13:00 US- Case-Shiller
Wed 29 May 2019
A 08:55 DE- Employment
AA 18:00 US- BOC Decision
A 18:30 US- EIA Crude
Thu 30 Mar 2019
AAEZ/CH- Holiday
A 12:30 US- Weekly Jobless
Fri 31 Mar 2019
AA 10:00 EZ- Flash HICP
A 12:30 US- Personal Income, Spending, Deflator
AA 14:00 US- Final Univ of Michigan


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