A Case For Understanding Economic/Fundamental Market Analysis

It is the first weekend of 2023. I hope you are holding up well with your new year's resolutions. I will keep this simple and short like I always do. That being said, let us dive into the meat of the matter at hand. Friday the 6th of January 2022 saw the release of the Nonfarm Payrolls (NFP) data for December 2022 by the Bureau of Labour Statistics in the United States of America (USA/US). This NFP data is basically the amount of non-agricultural jobs created per month in the US. 

EURUSD 1H : 6/01/2023

I'm here to make a case for currency speculators who insist on understanding the economics behind financial markets. That is to say, NFP releases usually inject a lot of movement into markets as you can see from the large hourly candles after it was released at 8:30 am New York local time. It is important to note that this release is always accompanied by other releases such as average hourly earnings as seen below. 

Some retail speculators have a religion of expecting the US dollar to strengthen when NFP prints above market expectation (Green) and vice versa when it prints below expectation (Red). This religion always gets them to ignore other figures like the average hourly earnings and employment data. This was their textbook expectation yesterday but you can see from the exchange rate depiction of the Euro vs Dollar on the chart above that the EUR strengthened in value even though NFP came out green. Read on to get the explanation.

You see, retailers know that information is money and in the business of currency speculation, you don't want to be overleveraged when you are wrong for lack of up-to-date information. This could wreck you. That is institutions get this information quite early before retail traders. And most often, these institutions base trades on fundamental analysis. And for Friday the 6th, it was a clear case of economics as the NFP figure was largely ignored. I know you want me to get to the point faster.

Here it is. The market was more focused on average hourly earnings. The simple reason will be, it printed red, and thus, the dollar weakened across the board. This is because the Federal Reserve has been raising interest rates for the whole of 2022 in order to slow down inflation. These rapid interest rate increases aimed at cooling down the economy made spending difficult, borrowing difficult, stocks and crypto unattractive and US government bonds very attractive. You could see from the chart that the EUR was dropping and has been for the most part of 2022. However, inflation started dropping and markets got excited that the FED will stop aggressively raising rates.  The FED did indicate that they had not seen the effect of these rate hikes on the earnings/wages of Americans. This meant the market was highly anticipating for wages to start dropping because it is one component the FED hopes to consider before cutting rates lower. 

So you see that while retail/small (by capital) traders were looking out for their usual Green to root for the dollar, the fundamentals were saying otherwise. I was thinking about this and thought I put this out here. I use to be like green  = buy the dollar and red =sell the dollar and though this works most of the time if you are fast to get in and out of a position, it is much better to understand how the printed figures are going to be interpreted in light with monetary policy by the institutions and banks. This can make a trader's technical analysis reasoning be more smooth. 

That is all I had for a first post in this year and until next time, stay safe!!!