Ask most established currency pair traders to pick between fundamental and technical analysis, and you’ll often get a lengthy monologue describing the benefits of both. This is because traders who’ve been around the currency market block know that a healthy mix of both types of analysis is the way to go. Just like in every healthy relationship, each have their important roles to play – and in this article, we’ll zero in on the role fundamental analysis plays. Specifically, we’ll be looking at an FXTM Invest Strategy Manager’s trading of the EURGBP currency pair in late September and early October as a case study.
FXTM Invest, for those unaware of the programme, is a copy trading feature that allows investors to automatically copy suitable forex traders and their strategies. Those they copy are called Strategy Managers. One of the more useful and interesting aspects of FXTM Invest is the sheer amount of insight that investors can get into the 2000+ Strategy Managers on offer; each manager has his or her own page that goes into great visual detail about their trading history, style and statistics. Through a trading service such as this, a potential investor can gain an understanding of a strategy manager’s trading pattern on a certain instrument – and by correlating it with world events, they can make sense of a manager’s thought process which can be a make-it-or-break-it decision if they’re considering following them.
Trading under the nickname of ‘OnePlus87’, this Strategy Manager has a distinctly recognizable pattern when it comes to trading the EURGBP currency pair in September and October. But, before we get into that, let’s see what actually happened to EURGBP recently – and more importantly, why it happened.
The central theme of any discussion that involves the pairing of Pound Sterling is undoubtedly Brexit. Ever since the referendum, the Pound has been on shaky ground, stirring political upheaval within PM Theresa May’s cabinet and putting a major Eurozone spotlight on the UK internationally. The biggest recent Brexit-related event was the informal summit held at Salzburg on the 20th of September, where Theresa May laid out her Chequers plan for a Brexit deal to EU heads Donald Tusk (President of the European Council) and Jean-Claude Juncker (President of the European Commission).
Needless to say, it didn’t go down well. Tusk, Juncker and virtually all the EU heads said the plan would not work and May flew back to London, defeated – certainly not looking forward to all the “I told you so’s” from her domestic critics. What this did to the EURGBP on the price chart is give it a violent upward swing the very next day. All of a sudden, a ‘no-deal’ Brexit looked more probable, which weakened the Pound, making EURGBP shoot up by 1.2% (from 0.88 to a cat’s whisker under 0.90). But it’s important to consider other factors beyond the ones making the biggest headlines when trading currencies. This is exactly what OnePlus87 has done.
Despite the sharp spike, EURGBP has created a relatively steady downtrend ever since September 21st. This shows that the Pound has actually shown resilience despite continued Brexit woes, or that there’s been some loss of confidence in the Euro. Actually, both are true – which is why on the 10th of October, the currency pair finds itself around the 0.87 mark, nearly 3% down since the fallout from Salzburg. Economic data – which includes retail sales, construction projects and manufacturing – were surprisingly strong for the UK by the end of August, and this resilience has shown in 0.7% GDP growth for the economy in what looks like the best-looking quarter for the country since the Brexit referendum.
More importantly, the Euro has been suffering due to drama over the Italian budget. Fears over Italy’s upcoming budget proposal exceeding limits have made the Euro less attractive – which has quite clearly weakened the Eurozone currency.
By looking at OnePlus87’s Trading Review on their Strategy Manager page, we see that in September and October they kept their positions open for long stretches of time on the EURGBP and only ever went in one direction when they decided to close: sell. We also see that they’ve been very profitable in these cases. Considering what we know from the events and data in late September and October, this tells us that OnePlus87 has learned to not give too much credence to volatile upswings whenever some negative Brexit sentiment occurs (such as the Salzburg summit) but to practice patience, discipline and follow other news – including economic data from the UK and politics in other countries that can negatively affect the Euro.
The Pound’s resilience despite continuous Brexit uncertainty, coupled with a weakened Euro, has made OnePlus87 go short – and make a profit – on the EURGBP in September and October. Historically speaking, OnePlus87 also understands that any negative Brexit news will also affect the Euro – so even if something like Salzburg happens, its effect probably won’t last too long.
Fundamental analysis plays an important role – but one must not get too side-tracked by the biggest headlines like Brexit. It’s important to follow other news, look at history and practice patience.
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Please note that the above article describes a specific example of how a trader made a profit in the financial markets using a combination of fundamental and technical analysis. It is important to remember that the markets are always unpredictable and you have an equal chance of making a loss if market movements do not go according to your plan. It's crucial to always keep this risk factor in mind.
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