U.S. Dollar IndexEducation
How to Analyse Forex Market Trends and Make Informed Trading Dec
The Forex market (FX), or foreign exchange market, represents a vast and dynamic space in which currencies are traded daily. Serving as the largest financial market in the world—trading in the Forex market reached US$7.5 trillion per day in April 2022, according to the Bank for International Settlements (BLS)—the Forex market delivers clear and actionable trends for seasoned traders and investors, though for the uninitiated these trends can appear confusing and unpredictable. Consequently, possessing accurate knowledge and analysis tools to analyse market trends and make informed trading decisions is key.
FX Market Movers
Everything begins with the central banks and their guidance in the FX space. Well-known central banks include the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE); major central banks play a crucial role in shaping market sentiment.
Monetary policy—altering the money supply—can significantly influence exchange rates and help establish long-term trends; when a central bank refers to monetary policy, it tends to be in the direction of increasing/decreasing the overnight target rate, which can make it more expensive (or less expensive depending on the rate move) for commercial banks to borrow reserves from one another in the overnight market.
For the US, the target range for the Fed funds rate is set eight times a year, reflecting the FOMC's (the Federal Open Market Committee is the policy-making arm for the Fed) assessment of the economic conditions and their desired monetary policy stance. Ultimately, commercial banks decide whether to borrow at the Fed funds rate based on their own needs and the prevailing market conditions. If banks have sufficient reserves at the central bank, they may not need to borrow, even if the Fed funds rate is low. The Fed conducts open market operations (OMOs) to influence the supply of reserves in the banking system. By buying or selling Treasury securities, the Fed can increase or decrease the amount of reserves banks have, thereby affecting the availability of funds for lending.
Recognising central bank projections and their guidance helps highlight possible trend reversals or can help indicate a resumption in current trends. For example, a central bank echoing a hawkish vibe (expected to raise rates) could see increased demand for its currency, and vice versa for a dovish setting.
Economic data such as inflation (CPI and PPI, for example), growth (Gross Domestic Product [GDP]) and unemployment are pivotal to understand and often move FX markets in the short term; this is what the central bank policymakers follow to help decide monetary policy. Central banks determine the longer-term trend, while economic indicators influence shorter-term price movement (this action can either be in line with the longer-term trend or against the trend [which can provide trading opportunities, such as buying dips or selling rallies in line with the bigger picture]). Out-of-consensus economic data tend to move markets most, particularly those that reach/exceed the upper and lower range estimate limits.
Geopolitics, of course, is another noteworthy market mover and one that can be difficult to trade. Wars, political unrest and pandemics create uncertainty for traders: geopolitical risk. When all three are aligned, that is, central bank guidance/expectations, economic indicators, and the geopolitical situation, this is where solid trending markets can occur.
How to Make Informed Trading Decisions?
How one elects to assess the trending structure in the Forex market will be unique to each trader. Some choose to focus their efforts solely on technical analysis; others prefer the comfort of merging both technical analysis and fundamental analysis (macroeconomics – as above) to create trading ideas.
Many professional traders use macroeconomic market analysis to help answer the question of what to trade: what market is likely to see a trend reversal over the next few months or a trend continuation? Technical analysis is used to help answer the question of when to trade, representing the study of historical price action, technical indicators and volume.
As a basic (hypothetical) example, assume that the Fed is closely monitoring inflationary pressures, which, according to the latest data, hit 5.0% in the twelve months to December 2025. With markets and economists indicating inflation could continue to rise in 2026, the Fed is widely expected to keep raising the Fed funds target range. Fast forward to January’s inflation number, which was expected to rise by 5.2% but instead surpassed median estimates and rose by 5.8%. A release such as this, knowing that the Fed is watching for further inflationary pressures, increases the chances of the Fed raising the Fed funds target range at its next meeting. By extension, this will affect rate-pricing forecasts and could bolster the US dollar (USD) following the inflation release, adding to the (hypothetical) current uptrend that has been in play since the beginning of 2025, when inflation began to rise. So, in this particular example, the macro backdrop could have been an opportunity to join an uptrend or add to an existing long (buy) position. The trigger to indicate when to enter long, however, may have been from something as basic as a technical resistance breach, thus providing a trigger point to enter the market. Therefore, not only would this trade have been backed by having a macro rationale, but also technical evidence.
Another example is the current situation as we head into 2024. The markets are gradually switching from a central bank tightening theme that was seen in 2023 to a central bank easing theme. This means that any negative data for the US economy could see the dollar sold off, and this is where traders would then shift to their technical strategy to seek a bearish setup.
FX Market Movers
Everything begins with the central banks and their guidance in the FX space. Well-known central banks include the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE); major central banks play a crucial role in shaping market sentiment.
Monetary policy—altering the money supply—can significantly influence exchange rates and help establish long-term trends; when a central bank refers to monetary policy, it tends to be in the direction of increasing/decreasing the overnight target rate, which can make it more expensive (or less expensive depending on the rate move) for commercial banks to borrow reserves from one another in the overnight market.
For the US, the target range for the Fed funds rate is set eight times a year, reflecting the FOMC's (the Federal Open Market Committee is the policy-making arm for the Fed) assessment of the economic conditions and their desired monetary policy stance. Ultimately, commercial banks decide whether to borrow at the Fed funds rate based on their own needs and the prevailing market conditions. If banks have sufficient reserves at the central bank, they may not need to borrow, even if the Fed funds rate is low. The Fed conducts open market operations (OMOs) to influence the supply of reserves in the banking system. By buying or selling Treasury securities, the Fed can increase or decrease the amount of reserves banks have, thereby affecting the availability of funds for lending.
Recognising central bank projections and their guidance helps highlight possible trend reversals or can help indicate a resumption in current trends. For example, a central bank echoing a hawkish vibe (expected to raise rates) could see increased demand for its currency, and vice versa for a dovish setting.
Economic data such as inflation (CPI and PPI, for example), growth (Gross Domestic Product [GDP]) and unemployment are pivotal to understand and often move FX markets in the short term; this is what the central bank policymakers follow to help decide monetary policy. Central banks determine the longer-term trend, while economic indicators influence shorter-term price movement (this action can either be in line with the longer-term trend or against the trend [which can provide trading opportunities, such as buying dips or selling rallies in line with the bigger picture]). Out-of-consensus economic data tend to move markets most, particularly those that reach/exceed the upper and lower range estimate limits.
Geopolitics, of course, is another noteworthy market mover and one that can be difficult to trade. Wars, political unrest and pandemics create uncertainty for traders: geopolitical risk. When all three are aligned, that is, central bank guidance/expectations, economic indicators, and the geopolitical situation, this is where solid trending markets can occur.
How to Make Informed Trading Decisions?
How one elects to assess the trending structure in the Forex market will be unique to each trader. Some choose to focus their efforts solely on technical analysis; others prefer the comfort of merging both technical analysis and fundamental analysis (macroeconomics – as above) to create trading ideas.
Many professional traders use macroeconomic market analysis to help answer the question of what to trade: what market is likely to see a trend reversal over the next few months or a trend continuation? Technical analysis is used to help answer the question of when to trade, representing the study of historical price action, technical indicators and volume.
As a basic (hypothetical) example, assume that the Fed is closely monitoring inflationary pressures, which, according to the latest data, hit 5.0% in the twelve months to December 2025. With markets and economists indicating inflation could continue to rise in 2026, the Fed is widely expected to keep raising the Fed funds target range. Fast forward to January’s inflation number, which was expected to rise by 5.2% but instead surpassed median estimates and rose by 5.8%. A release such as this, knowing that the Fed is watching for further inflationary pressures, increases the chances of the Fed raising the Fed funds target range at its next meeting. By extension, this will affect rate-pricing forecasts and could bolster the US dollar (USD) following the inflation release, adding to the (hypothetical) current uptrend that has been in play since the beginning of 2025, when inflation began to rise. So, in this particular example, the macro backdrop could have been an opportunity to join an uptrend or add to an existing long (buy) position. The trigger to indicate when to enter long, however, may have been from something as basic as a technical resistance breach, thus providing a trigger point to enter the market. Therefore, not only would this trade have been backed by having a macro rationale, but also technical evidence.
Another example is the current situation as we head into 2024. The markets are gradually switching from a central bank tightening theme that was seen in 2023 to a central bank easing theme. This means that any negative data for the US economy could see the dollar sold off, and this is where traders would then shift to their technical strategy to seek a bearish setup.
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