The Drivers Behind FX Trends
Taking a deep dive into the key aspects of macro driving FX volatility and movement.
What’s up everyone,
This will probably be the first of many reports that I’ll share with you breaking down the drivers behind FX.
This topic was highly requested in our private discord group so I thought no better time than now to explain:
What drives a currency’s appreciation or depreciation?
How to interpret a currency’s movement when both economies seem to have negative data coming from them?
Lend me your attention:
What Drives FX?
When trying to get your head around what factors decide whether a currency is bullish or bearish I truly believe it starts with a few fundamental high-level macroeconomic data points such as:
The country’s economic health, GDP YoY, QoQ.
The interest rate within the economy & inflation.
Domestic government bond yields.
Market sentiment on a currency.
The health of the labour market.
The domestic country’s central bank monetary policy (are they dovish or hawkish)
The government’s fiscal policy, are they running a fiscal deficit or surplus, is their fiscal plan complimentary of the central bank’s monetary policy
The above can be grouped into 4 fundamental pillars, being economic data, central bank policy, geopolitical events (presidential elections, wars etc) and market sentiment.
Economic Health
GDP as we know plays a crucial role within any economy around the world, providing us with a backward-looking hard piece of data to show the relative strength or weakness within the economy over a given time period.
Now GDP won’t dictate your day-to-day price movements, leave that to the more frequent data releases such as your CPI prints, interest rate decision, retail sales, housing-related data, non-farm payroll and so on.
It’s vital to understand that the less frequent data points like GDP, which gets released only 4 times a year on a quarterly basis, dictate the more significant macro picture trend for currencies such as EUR/USD for e.g; then you have your more frequent data points like the ones mentioned above (CPI, Home Sales, Non-farm) which are released more frequently on a monthly basis which has the ability to cause massive spikes in price and change the intraday or weekly price action for a given currency.