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, forex 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.
There is an old saying that one picture says a thousand words. In thos regasrd, take a look at this chart after US CPI came in weker than forecast, bond yields tumbled sharply and the dollar followed.
Source; The Amazing Trader
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