When trading CFDs on assets like Forex, Commodities, Indices, and Cryptocurrencies, it is only necessary to consider the socio-economic and geopolitical events at a macro-economic level, not at a micro-economic level.
This is because these CFD assets’ price movements are only affected by national and international affairs. Asset prices are not affected by the financial statements and stability of an individual company.
The price of stocks, on the other hand, are affected by the country’s micro-economic climate that the company resides in. Therefore, before trading on stocks, it is vital to study both the macro- and micro-economic conditions of the country and the company that is linked to the relevant stock to determine which way the price will move.
Fundamental analysis: Keeping track of national and international news events
As the Jones Mutual financial analysts keep on reminding their clients, asset price movements are linked to socio-economic and geopolitical events, both expected and unexpected that occur on a daily basis. These events usually make news headlines in advance or just after they have happened. Thus, when CFD trading, it is vital to keep track of these events.
The study of these news events is known as fundamental analysis and the best way to describe the process is to cite a case study based on one of the world’s most significant news events: Brexit.
There is other major news that breaks on a daily basis like anything to do with Donald Trump, the 45th president of the USA, but, news about the USA and Donald Trump’s machinations seem to be over-reported. Thus, the markets look to be used to his crazy utterances and his foreign and domestic policies. The price of the US dollar appears to be ignoring Donald Trump at the moment.
Brexit, on the other hand, especially whether a deal will be reached or not makes news headlines on a daily basis. The fact is that time is hurtling towards 29 March 2019, the official divorce date, and a comprehensive agreement between Great Britain and the European Union.
The Prime Minister of the United Kingdom, Theresa May’s biggest challenge is from within her cabinet. Twenty-seven European Leaders approved the UK’s exit terms on Sunday, 25 November 2018. And bbc.com has recently reported that “May will say to her MPs who oppose her plan that rejecting the Brexit deal will be risky and lead to division and uncertainty.”
However, the question that traders have to answer before trading on any UK-related assets is what the continuing turmoil over Brexit will do to the price of these assets. If we look at the Great British Pound against the other major currencies like the Euro and the US dollar, since the results of the 2016 Referendum were announced, the GBP has devalued against the USD by over 12%.
The market insight website, fxcm.com correctly notes that the aftermath of the 2016 Brexit referendum “in favour of Brexit created high levels of investor angst regarding the GBP, comparable only to the immediate aftermath of WWII or Black Wednesday.”
In short, markets do not like instability, and most financial analysts did not believe that the outcome would be decisive in favour of the “leave campaign”. This result has launched the GBP into a period of extreme volatility and uncertainty especially against the EUR.
As an aside, it should be noted that the GBP seems to be trading firmer against the USD than against the EUR.
Fundamental analysis: The trader’s response to the news
It must be taken into account that fundamental analysis should not be used as the only tool to determine an asset’s price movements. Fundamentally, the same news affects various assets differently.
For an explanation of this comment, we need to return to our case study. In this study, we noted that the GBP seems to be trading firmer against the USD than against the EUR. It is the same news. The only difference is that the two currencies that traditionally are part of the GBP currency pairs have reacted differently to the same reports.
The reason for this that can be posited is that, because the EUR is the European Union’s currency and the Brexit saga, is directly between the EU and Great Britain. Thus, it makes sense that the EUR/GBP price is more volatile than the GBP/USD price.
Therefore, it is vital to use technical analysis tools as well as fundamental analysis to correctly determine an asset’s price movements before trading on the asset.