Fundamental Analysis & Market Sentiment Introduction
Fundamental Analysis, with respect to the FX market is the analysis of macroeconomic data and political events. This may be used to predict future price movements of a currency. Market sentiment is the general opinion of the market. The three opinions that a trader has are neutral bias, upside bias and downside bias. An upside bias is a bullish sentiment and a downside bias of a pair is a bearish sentiment.
Macroeconomic data of the country can usually be found online using an economic calendar. In an economic calendar there may be an indication of how much volatility will be caused by the data. This indicator is tremendously important even if it is a number or a report. This economic data can change the sentiment of the market. It also important to note that data can be revised either up or down so this can affect the economic outlook of the country you are analysing.
Market sentiment is a key indicator of where the market is heading. If the market is bullish/bearish, and your personal opinion is bearish/bullish on the pair then you should consider carefully whether to not go against the general consensus of the market. However, if you firmly believe that the market is overvalued/undervalued and firm evidence supports your view of the market, then you may have more confidence in your trade.
We have shown a key example below using the pair EUR/USD. We can see on the 10th of July there was a lot of noise in the market (outlined by the blue triangle). This was primarily caused by the FOMC releasing minutes and the speech made by the Federal Reserve President, Ben Bernanke. We also note that the pair had been supported at 1.27729. The pair had held this level after the minutes and the speech. So it is important to note that significant events such as reports and key speeches can be a floor for the market and maybe even a ceiling for the market.
Although trading on news could be considered to be risky, this is due to the market already pricing these events in. This is why when data comes out; there is not a lot of noise in the market. The traders have already anticipated what the data will be.
The use of both technical and fundamental analysis will give you a better view of the market. It will also enable you to use all the tools that are disposable to you. Having a better view and a suite of tools to analyse the market will mean you can make informed decisions. Psychology also plays a big role in the market, and this why you should always consider the general sentiment of it. So when analysing the market, the three key details to remember are sentiment, fundamental and technical studies.