Forex Fanatic

The fundamental and technical factors are undoubtedly essential to determine the dynamics of foreign exchange. There are, however, two additional factors that are essential to understand movements on the short-term market. These are the expectations and feelings. They may be similar, but remain distinct.

Forecasts are formed before the publication of economic statistics and financial data. Paying attention only to the figures published is not enough to predict the future course of a currency.

For example, if the U.S. GDP came out at 7% but 5% in the previous quarter, then the dollar will not necessarily rise. If the forecasts of market had expected a growth of 8%, then reading 7% could come as a disappointment, thereby resulting in a very different reaction of the market.

Nevertheless, the forecasts have been replaced by feelings of the market. That is the prevailing market attitude vis-à-vis an exchange rate, which could be a result of the overall economic assessment to the country in question, the emphasis general market, or other exogenous factors. Take the example above on the U.S. GDP, even if the figure of 7% is below expectations, the market may not show reaction. One possible reason is that the sentiment could be positive for the dollar regardless of actual and projected figures. This could be the investment markets of USA, or the fundamental principles low against the currency (euro, yen or sterling).

A term which is usually associated with the “feeling” is “psychology”. During the first two months of 2000, the euro has suffered fierce selling pressure against the dollar despite improvement of the fundamental principles in the Eurozone. That’s because the market psychology had decidedly favored capital to the U.S. due to signs of continued non-inflationary growth, and due to the feeling that most subsequent increases in interest rates will work in the U.S. ‘advantage yield spreads of the USA, without derailing the economic expansion.