It is possible to trade on just technical analysis. And quite a few Forex traders operate just on that!
However, it’s good to know that what moves the forex market at the very bottom – hence the name – is fundamental changes in value.
So, even if you are a budding technical forex trader, or one with some experience, having at least a basic knowledge of fundamentals will help your trading considerably.
Fundamental analysis is a really broad field that will give you plenty to study if you are interested in it. But there are some key elements that pop up regularly and distort the markets.
A purely technical FX trader might see a good set up, and suddenly the market moves in the wrong direction. Why? Well, it could be one of the events we discuss below.
Interest Rate Decisions
Central banks are mandated to maintain price stability, and they have a diverse range of tools to do this. Without getting too far into the weeds, basically, central banks will raise interest rates when they think the economy is overheating and will cut interest rates when they think the economy needs a little help.
Higher interest rates increase demand for the currency. This will make it stronger compared to other currencies. Lower rates will have the opposite effect. Many times, there is a consensus among analysts ahead of the rate decision.
If the central bank does something unexpected, the market can be significantly affected, with moves in the hundreds of pips range!
Consumer Price Index (or inflation)
Connected with central banks is the inflation rate. If prices change significantly, it means there isn’t price stability, and central banks are going to want to return the inflation rate to their target range.
When inflation is reported to be outside of the target range, currency pairs move on the expectation that the central bank will step in.
Gross Domestic Product (GDP)
The total value of the production within a country is called the GDP. The amount of money in circulation needs to match this, and it’s a delicate job for central bankers. If the GDP grows, it means the economy is growing.
Generally, that means more people want to invest in the country, increasing the value of the currency. If the GDP disappoints, then it can weaken the currency.
GDP figures are often published on a quarterly basis, and can move currency pairs well over a hundred pips if they catch the market by surprise.
The reason to exchange currencies is to pay for goods and services from other countries.
Demand for a currency often depends on its level of imports and exports. This means that the trade balance can also have a strong effect on currency pairs. A larger trade surplus means there is more demand for the currency, and it should get stronger.
A larger trade deficit means there is less demand for the currency, so it should get weaker.
There are many other events that could affect the currency, but these are usually the key ones that could catch a technical forex trader by surprise.
You can follow the Economic Calendar on the Orbex website to get advance warning when one of these are coming up, and check out the blog for a preview of what might happen.