Many forex fundamentalists give importance to “high-impact” news such as monetary policies and interest rates, but overlook “low-impact” news as purchasing managers’ index (pmi) and money supply. In hopes of being ahead of the technical traders, they are, in reality, left behind, if not on the same level. Although the most optimal strategy is to use technical analysis and fundamental analysis as complements rather than substitutes, understanding the “low-impact” data is more critical to forecasting “high-impact” news.
For example, Federal Reserve Chair Jerome Powell disclosed a modification to the monetary framework and inflation goal at the Jackson Hole Economic Policy Symposium in September 2020. Contrary to the initial inflation target of reaching 2% set by all central banks, the new Federal Reserve inflation target is to reach an average of 2%. Since the economy has been unsuccessful in achieving the 2% target over the years, Chair Powell shared that now when the economy fluctuates below the 2% target, expansionary monetary policies and associated tools will be introduced to target the above 2% inflation rate. If the economy is overheated, contractionary policies will be used to decelerate economic growth. These policies do not guarantee that the inflation rate will increase beyond 2% or fall below 2%, but the goal is to average as close as possible to 2%. This decision was a result of a compilation of several low-impact news and data after the 2008 Financial Crisis.
Although these policies and speeches include a future outlook, disclosure of necessary modifications is lagged since the drastic effects are displayed several months after implementation. But, the “low-impact” news shows us these signs ahead of time and much closer to when these policies are introduced. The Manufacturing and Services PMI are released monthly, with a value above 50 indicates an expansion of the industry, and a value below 50 indicates contraction. Money Supply measures the circulation and deposit of a domestic currency; hence, it is directly affected by the monetary policies and is released monthly. Due to its direct correlation to economic health, this data can be used as a leading indicator of the policies’ effects. Suppose these fundamentals portray strong consecutive numbers that may potentially bring the economy closer or above the 2% inflation rate. This data would represent an increase of demand and growth in productivity rate to produce sufficient supply to meet the demand. The effects may lead to higher employment rates, GDP, and interest rates. In that case, there is a very strong possibility of contractionary policies being released from the Federal Reserve to diminish economic growth. Contrariwise, suppose pmi and money supply are weakened. In that case, the expansionary policies may have to be in effect much longer, and more tools may need to be utilized to stabilize the economy again.
Lower impact news can often tell us more about the economy, future outlook, and policies to be introduced than mere monetary policies and interest rates. Similar to how lower timeframes work together to fulfill the higher timeframe market structure, low-impact fundamentals combined produce high-impact policies. As a successful fundamentalist, it is essential to learn how to decipher and utilize all macroeconomic news, speeches, and testimonies.
This analysis and any provided information can be used only for educational purposes. SharmaFX is not a professional financial institution nor provides any financial services. SharmaFX does not provide any financial advice, investment advice, or trading signals. SharmaFX is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.
Editors’ Picks
EUR/USD remains depressed below mid-1.1800s; downside potential seems limited
The EUR/USD pair attracts some sellers for the second consecutive day on Tuesday and hovers below mid-1.1800s amid a relatively quiet trading action during the Asian session. The broader fundamental backdrop, however, warrants some caution for bearish traders before positioning for deeper losses.
GBP/USD trades with negative bias, eyes 1.3600 ahead of UK jobs data
The GBP/USD pair trades with a negative bias for the second straight day, though it lacks bearish conviction and holds above the 1.3600 mark through the Asian session on Tuesday. Traders now look forward to the release of the UK monthly jobs report, which will influence the British Pound and provide some impetus to the currency pair.
USD/JPY falls back toward 153.00 as Japanese Yen finds its feet
USD/JPY has turned south to test the 153.00 level after having faced resistance near the 153.75 zone in Asian trading on Tuesday. The divergent BoJ-Fed policy expectations offer some support to the Japanese Yen. That said, Japan's weak Q4 GDP print, released on Monday, tempered bets for an immediate BoJ rate hike. This, along with the underlying bullish sentiment, could limit the pair's downside.
Editors’ Picks
AUD/USD eases toward 0.7050 after RBA minutes
AUD/USD inches lower toward 0.7050 in Tuesday's Asian trading, reacting little to the RBA February Minutes, which reinforced a tightening bias. The hawkish outlook, however, fails to provide any impetus to the Australian Dollar as the timing of the next rate hike is unclear. In contrast, bets for more rate cuts by the Fed keep the US Dollar bulls on the defensive and act as a tailwind for the Aussie amid the underlying bullish sentiment.
USD/JPY falls back toward 153.00 as Japanese Yen finds its feet
USD/JPY has turned south to test the 153.00 level after having faced resistance near the 153.75 zone in Asian trading on Tuesday. The divergent BoJ-Fed policy expectations offer some support to the Japanese Yen. That said, Japan's weak Q4 GDP print, released on Monday, tempered bets for an immediate BoJ rate hike. This, along with the underlying bullish sentiment, could limit the pair's downside.
Gold declines as trading volumes remain subdued due to holidays in China
Gold price extends its losses for the second successive session, trading around $4,930 per troy ounce during the Asian hours on Tuesday. Gold price is trading nearly 0.7% lower at the time of writing as trading volumes stayed thin due to market holidays across China, Hong Kong, and other parts of Asia.
AI Crypto Update: Bittensor eyes breakout as AI tokens falter
The artificial intelligence (AI) cryptocurrency segment is witnessing heightened volatility, with top tokens such as Near Protocol (NEAR) struggling to gain traction amid the persistent decline in January and February.
US CPI is cooling but what about inflation?
The January CPI data give the impression that the Federal Reserve is finally winning the war against inflation. Not only was the data cooler than expected, but it’s also beginning to edge close to the mystical 2 percent target. CBS News called it “the best inflation news we've had in months.”
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