How to determine a trend reversal by fundamental analysis?

As a rule, all discussions about trend reversal on the currency market are reduced to various tools of technical analysis: graphical formations and Japanese candlesticks, breakdown of trend lines and Fibonacci indicators. But is it possible to trace a trend change using fundamental analysis, you might ask? We answer: you can and you should!

Fundamental analysis and trend reversal

Central banks are the "parents" of powerful trends

If you look at the dynamics of currency trading from a "great height," it is obvious that all powerful trends are laid down by central banks.

Regulators have traditionally used monetary policy instruments to manage economic growth and inflation. The effectiveness of these measures can be viewed in different ways. For example, many economists believe that monetary authorities merely relieve the symptoms of the disease, rather than solve the real problems. One way or another, their actions have an undeniable impact on the currency market. A high interest rate attracts investors to the country and supports the currency, while a low rate, on the contrary, leads to its depreciation.

Future interest rates are more important than current interest rates

But this is only part of the truth: As we know, financial markets are driven by expectations. Future interest rates are much more important than current interest rates to determine when trends break. If a country has a high rate, but the market expects it to fall, the national currency is likely to become cheaper.

As an example, recall the AUD/USD pair: the RBA interest rate is significantly higher than the Fed rate, but in 2014 the pair entered a downtrend and fell by two round figures on expectations of policy easing by the Australian regulator.

The opposite pattern also makes sense: if a country has a low interest rate, but an increase is expected in the foreseeable future, the currency will strengthen. We do not have to go far to find examples: the powerful rally for the dollar that began in July 2014 is exactly of this nature. Note that the rate hike will not occur until late 2015, but the trend for the greenback was set a year earlier.

Powerful trends in Forex

Monetary policy of the Central Bank - a benchmark for trade

How to use it in trade? Experienced traders closely follow the changes in the rhetoric of central banks and monetary policy statements. When they occur, powerful new trends emerge in the currency market.

It is useful to know that in economic journalism there are so-called "observers" of the regulators, who often have additional information and make it publicly available. A prime example is Wall Street Journal economics columnist John Hilsenrath, who actively studies Fed policy and has repeatedly guessed at trend shifts.

Changes in a country's monetary policy are in most cases caused by the dynamics of the national economy. If the government anticipates a slowdown in growth, it takes a policy of "cheap money" (i.e., low interest rates) to stimulate it. Conversely, a sufficiently strong economy does not require monetary support, so the authorities move smoothly to policy normalization.

Trend reversals on and Central Banks

As a rule, each regulator voices its targets for inflation, economic growth and unemployment. The "collective mind" of the financial market compares what it wants with what is real. If serious discrepancies are found, monetary policy expectations quickly change, and as a result, new trends are set in the market.

Interestingly enough, as a rule, central banks warn about the coming rate hikes in advance. This is due to the fear of harming the recovering economy by tightening too hastily. The Bank of Russia's action in December 2014, when the rate was raised from 10.5% to 17% per annum overnight, is more of an exception that confirms the rule. Rate cuts, on the other hand, often come as a shock to markets.

This is where the "ideal trading opportunity" for Forex Traders are among the first to catch the signal of plans to raise the rate and buy that country's currency that has not yet gone up in price. However, don't be upset if you didn't have time to do so at the beginning of the trend's life: as a rule, market movements initiated by central banks are long-lasting and sustainable.

Discussion of trading on the news with practicing traders
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Комментарии ( 4 )

  1. This is all very admirable, just like everywhere else no specifics. Why not list decent financial forex observers and news indicators? Where's the most important thing - "where do you get your information?" Because Google is bursting with sites of forex kitchens and not a single normal news site in Russian.

    1. What you want to know about is written here: https://xtrader.fortrader.org/learn/fundamentalniy-analiz-forex/fundamentalnyj-analiz-forex-osobennosti-torgovli-na-novostyax.html
      Where to get information: where you're used to doing it: calendars, professional portals - RBC, forexpf and the like. You should not think that there are not enough sites. The Dow's trading feed is quite sufficient, and brokers have it. Or I don't really understand your question?

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