If you’re like the majority of other Forex traders, you might have focused to a large extent on technical analysis when making your trading decisions. However, to get the bigger picture of the market and to improve your trading performance, we can’t neglect the importance of fundamental analysis. Fundamentals initiate new trends and trend reversals, and professional traders use technical levels only to find the best entry and exit points.
How to Analyze the Forex Market on a Micro-Fundamental Level
Fundamental analysis of the Forex market can be divided into the analysis of macro-fundamentals and micro-fundamentals. While macro-fundamentals move exchange rates in the long-term with changes in the purchasing power parity, economic growth, balance of payments or interest rate differentials, micro-fundamentals affect currencies in a relatively short period of time. They include the analysis of economic news, the current social and political situation and the short-term sentiment in the market.
Most traders still focus on the short to medium-term in Forex, and only a small number of traders are position traders who hold their positions for months or even years. That’s why traders need to know how to read the market from a micro-fundamental perspective, and the best way to do so is by following an international economic calendar.
What Information Does an International Economic Calendar Reveal?
Economic calendars are designed to provide information on key economic news and reports in the market. Central banks and statistical bureaus regularly publish market reports, and many of them can have a big impact on exchange rates in the short-term. Volatility (i.e. the price-change relative to time) usually picks up significantly after a major report, especially if the actual number doesn’t match the market expectations. There is even a separate trading style which solely focuses on international economic calendar reports – it’s called news trading.
The Importance of Following Currency-Specific News
Another way to trade on micro-fundamental events is by following currency-specific news. If you’re a beginner to the market, focusing on a few currencies can be of great advantage as it allows you to follow their respective news and market developments. Let’s say that you want to focus on GBP/AUD, as its relatively high volatility creates many trading opportunities. Beside following an international economic calendar for the mentioned currencies, you should also deepen your understanding of current market events by following both Australian dollar news and forecasts, as well as British pound news and forecasts.
For example, rate hike expectations and the change in supply/demand forces can be predicted with a relatively high accuracy by simply following the news. Markets are intertwined today, and some developments in one market can easily spill over to the currency market. In the case of the Australian dollar, the expected change in the price of commodities and the economic situation in China (of which Australia is a major trade partner) have a direct influence on the value of the Australian dollar, and in turn on the British pound/Australian dollar exchange rate.