Best Time of the Year for a Fundamental Outlook

Best Time, of the Year, Fundamental Outlook, Fundamental Analysis, fx trader, forex

08 Feb 2016

In this article, the author looks at the power of fundamental analysis through practical 2015 examples and gives his recommendations for 2016 by showing how to implement a fundamental outlook to gain clarity and confidence in your trading decisions.

The power of fundamental analysis

In our annual currency forecast video, which was posted on 27 December 2014, we provided directional predictions for 2015 across several currency pairs based on nothing other than the fundamental outlook. No technical analysis, no crystal balls, simply solid fundamental factors.

Eight of the nine forecasts moved in line with our original expectations, generating moves in excess of 9000 pips in their intended direction throughout the course of 2015. This is by no means to brag, boast or suggest how great we are at forecasting, as the market does not take lightly to ego. Instead, this is solid reinforcement of how important and powerful it is to have an overriding fundamental bias when trading. It gives you greater focus on the currency pairs most likely to rise or fall, provides superior clarity on the bigger picture drivers and therefore the direction that these pairs are most likely to move in. Armed with these two essential factors, currency selection and their intended direction, you can stack the odds heavily in your favour of generating a healthy profit come the end of the year.  

Fundamental drivers are importantly forward looking and predictive in their nature, especially when you spot them early enough. It’s very easy to discuss currency movements after the event, as many often do, but as traders we don’t get paid this way. We have to make bold speculations on direction before the moves take place and only then, if we are proved correct, do we profit.

Getting your fundamental forecasts buttoned down now, prior to the trading year beginning, is a sure fire way to proactively approach the markets rather than sitting, waiting and wondering why you have missed out on all these huge moves come year end.

Some 2015 examples

Example 1 - EURUSD had a fall of over 1700 pips. Why?

Coming into the latter part of 2014 speculation was building that, due to low inflation and weak growth across the Eurozone area, the European Central Bank (ECB) would be forced to act in order to weaken their currency and stimulate the stagnating economy. This speculation of a full blown quantitative easing (QE) programme was pressurising the EUR across the board and then, when it was finally confirmed at the January 2015 ECB meeting, the flood gates opened. No trader in their right mind would have wanted to trade against the might of a central bank who is fully committed to weakening their respective currency.

EURUSD in particular took a large brunt of the impact as the pair was aligned with a bearish European Central Bank versus an upbeat Federal Reserve (US central bank). This provided the perfect concoction (known as ‘policy divergence’ which is simply two central banks taking an opposite stance to one another) for a sinister and one directional move lower in the pair. EURUSD became one of our favoured pairs to sell in the first few months of 2015, where it sank approximately 1700 pips in just a few months (see Chart 1). We were able to trade the pair with confidence and clarity knowing that our directional bias was cemented in line with the overall fundamental picture and that we were trading alongside the might of a central bank.

Best Time, of the Year, Fundamental Outlook, Fundamental Analysis, fx trader, forex 1 EURUSDWeeklyChart 1