Broker Alpari recently published an analysis of the FX market, which stated that remaining on top of global factors was the main basis for maintaining successful trades. However, the research acknowledged the importance of macroeconomic factors such as consumer price inflation. So which exerts more influence?

“Global events are definitely important and can often affect domestic policies, but I would lean more on domestic macros,” stated Nikos Tzabouras, the Senior Market Specialist at Tradu. “For example, the US dollar rallied in 2022 as the Fed hiked rates aggressively. In stark contrast, the Japanese yen suffered as the Bank of Japan maintained an ultra-loose setting with negative rates and yield curve control.”

Kate Leaman, the Chief Market Analyst at AvaTrade, said that the extent to which currency movements are influenced by global events and domestic market factors depends on individual circumstances, while Ben Laidler, the Global Markets Strategist at eToro, suggests government and central bank strategy is even more important, noting that 45% of the world’s currencies are defined as a ‘soft peg’ and a further 15% have a hard fixed exchange rate fully determined by domestic authorities.

Diverse Factors in Global Currency Markets

“Global FX markets are mostly driven by interest rate expectations,” agreed Przemysław Kwiecień, the Chief Economist at XTB. “Nearly every news release is ‘recalculated’ into shifting interest rates probabilities, including both macroeconomic and geopolitical events. There is also liquidity and positioning in play, but to interpret day-to-day changes in major FX pairs, interest rate assumption is good enough.”

Fiona Cincotta, the Senior Market Analyst at City Index, suggested that traders look at this in terms of short and long-term impact. “Global events can produce a knee-jerk reaction in the FX markets,” she said. “Domestic macroeconomic factors and central bank policy drive the longer term picture.”

It could be assumed that major currency pairs like EUR/USD and GBP/USD are driven by global events whereas exotic pairs have more exposure to domestic issues.

“A currency pair like USD/TRY is already subject to volatility as you have a modestly-traded currency of a relatively small economy measured against the world’s largest economy by GDP, which also happens to have the world’s reserve currency,” said David Morrison, the Senior Market Analyst at Trade Nation. “For these reasons alone, the Turkish lira is likely to be volatile and subject to domestic influences.”

But, we have seen similar things happen with major currency pairs. In September 2022, the sterling collapsed in the aftermath of the UK mini-budget, and at the beginning of 2015, the Swiss franc soared against the euro and US dollar when the Swiss National Bank removed its ‘floor’.

“In all these instances, investors were caught unawares - hence the dramatic moves and high volatility,” said Morrison. “Great if you are on the right side of the trade, but luck played a large part in at least two of these cases. Best to focus on global events and use technical analysis to help you identify the longer term trends.”

Technical Indicators and Market Psychology

Simon Harvey, the Head of FX Analysis at Monex, observed that technical analysis serves a short-term purpose when analyzing FX markets. “It tends to be indicative of the underlying market psychology, but ultimately we don’t view it as too instrumental over the medium term compared with fundamental factors.”

Taking a discretionary view of the future when adopting a position can be a challenging approach for retail traders as they are often looking at intelligence the market has already fully discounted and moved on from.

“Indicators allow us to view trends unemotionally and without bias, which is why we use moving averages, stochastics, or rate of change,” said Chris Weston, the Head of Research at Pepperstone. “But, it is important to know how to fit them into a strategy.”

A momentum trader needs to look at indicators that highlight a strong one-way move, often started by identifying a breakout in price. Those trading mean reversions need to look at indicators that show when the price has pulled too far from a mean, and the probability of a move has shifted.

“We also need to consider that FX has a far higher propensity for mean reverting moves, often driven by major differences in central bank policy and widening interest rate and growth/inflation differentials, and these can be very powerful drivers of returns,” said Weston.

“However, the biggest issue for many retail traders is staying in the position when in profit – we can use technical indicators such as moving averages to keep us in a trade and unemotional, should we get a powerful trend in an FX pair,” he added.

Alpari referred to the death cross (when a short-term moving average crosses below a long-term moving average) and the golden cross (when a short-term moving average crosses above a long-term moving average) as major factors in identifying the right time to trade.

Stefano Gianti, the Education Manager at Swissquote, noted that certain reversal patterns tend to emerge around potential support or resistance levels, particularly just before the release of highly anticipated macroeconomic news such as central bank meetings, significant economic indicators like non-farm payrolls, or other news related to inflation or market sentiment.

“Trends that arise after these chart conformations can sometimes be long-lasting,” he stated. “This is why we make a point of explaining to clients how fundamental analysis can have an impact on prices in the long term, but in the short to medium-term, it is important to monitor technical analysis - especially when deciding on the timing of position entry.”

Strategies for Effective Technical Analysis

Cincotta observed that technical signals such as the death cross and golden cross are most effective when used in conjunction with other technical or fundamental evidence. “They are useful, but I don’t use these indicators in isolation,” she mentioned.

Morrison went further, suggesting the terms were rather dramatic and helped to undermine what can be a very useful set of indicators. “The moving averages are generally understood to be the 50 and 200-day moving averages,” he pointed out. “But the market will have been moving up or down for some time before there is a cross so there is a danger that you miss a chunk of the move by waiting for the cross to happen.”

Traders can correct this by using shorter-term moving averages. The smaller the moving average pair, the more signals you get, but there will also be a higher probability of the signals being false.

“Traders should experiment and back-test, as certain combinations of moving averages work better than others, and this can vary across specific currency pairs as well,” added Morrison.

According to Alexander Kuptsikevich, the Senior Analyst at FxPro, the Golden Cross and the Death Cross work better in commodity and stock markets, while Tzabouras agreed that they need to be considered in combination with the broader macroeconomic and fundamental environment.