The Impact of Economic Forecasts on Forex Trends

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As a forex trader, it’s crucial to understand that economic forecasts are closely linked to forex trends. Good macroeconomic predictions can significantly enhance trading profits and increase the chances of success. But what is the current state of economic forecasting?

At the end of 2009, Bloomberg ranked 65 economic forecasters and institutions, with Goldman Sachs Group Inc. and its chief economist Jan Hatzius taking the top spot. When these economic forecasters reviewed the indicators that had knocked down the US economy over the past two years, one stood out: the unemployment rate.

Hatzius indicated that from the government employment report in January 2008, he knew that the slump in the US housing market would lead to a comprehensive economic recession, prompting the unemployment rate to rise from 4.7% in November 2007 to 5% in December 2007. He informed his clients that the US economy was entering a full recession—a conclusion that the official economic recession arbitrator, the National Bureau of Economic Research, would only reach a year later. Bloomberg data shows that Hatzius and his team ranked first in economic prediction accuracy. Additionally, Hatzius ranked first in US GDP predictions and second in unemployment rate and Federal Reserve interest rate trend predictions.

Hatzius stated that after 2010, the US unemployment rate would remain high, adding resistance to economic recovery. In early October 2008, he and his team predicted that by the end of 2009, the US unemployment rate would reach 10%, and the average unemployment rate for 2010 would be 10.3%. In November, the US government released data showing an unemployment rate of 10.2%.

During the financial crisis at the end of 2008, Hatzius and his team predicted that the US economy would resume growth in the third quarter of 2009. The prediction was correct; that quarter saw an increase of 2.8%. In August 2009, they estimated that economic growth in the second half of the year would reach 3%, with an average growth of 2.1% for 2010.

Thomas Lam, senior sovereign analyst at Singapore’s United Overseas Bank Group, ranked second overall and also second in GDP predictions. Kurt Karl, chief US economist at Swiss Reinsurance Company, ranked first in predicting US consumer price index and Federal Reserve funds rates and third overall.

The economists who made the most accurate predictions about unemployment rates were Richard Berner and David Greenlaw from Morgan Stanley. Despite this, they and Hatzius failed to fully point out the impact of economic collapse on unemployment. In January 2009, Berner and Greenlaw predicted unemployment rates of 8% and 8.8% for the first two quarters of that year; actual figures were 8.5% and 9.5%, respectively. Economists at Goldman Sachs and Morgan Stanley felt more satisfied as salespeople, traders, and clients needed them more than before after the financial system collapsed in 2008. Greenlaw said: “Real-time interaction has become more frequent.” He now stays mostly in the trading department to answer colleagues’ questions about how interest rates affect economic trends. Bloomberg’s ranking of these 65 forecasters was based on their accuracy in predicting GDP, unemployment rates, Federal Reserve target fund rates, and the US consumer price index for four quarters up to June 2009.

Exchange rates are a comprehensive reflection of macroeconomics; they not only reflect trends in bonds, stocks, futures—the three major financial markets—but also real estate and even the entire national economy’s trend condition. Some people ask why predict significant forex trends. The answer is simple: because frequent trading during volatile trends incurs high transaction fees; profits from volatile trends are small with limited space within a unit time; certainty is poor during volatile trends making risk control difficult.

On the contrary, significant trends have great advantages; thus, every wave of significant trends produces miracles because once you bet in the right direction, even a fool can win. People’s psychology changes cyclically just like markets do; sometimes favouring one-sided trading strategies and other times range trading strategies—often mismatched with market psychology.

Technical analysis can only follow markets; it will not proactively tell you to use range trading strategies or oscillation indicators when markets are volatile while your trading psychology is still intoxicated with one-sided trends—leading you to favour one-sided trading strategies when analysis indicates oscillation indicators are primary—resulting in defeat.

When markets shift from volatility to one-sided trends, technical analysis struggles to confirm this start; you may still be immersed in volatility having just suffered losses from it—starting to use range trading and oscillation indicators only to incur losses again.

Technical analysis does not proactively inform you whether the current market is trending or consolidation; it can only tell you the past market was trending or ranging. Therefore, technical analysis can never predict the future. This also applies to wave theory, which relies on two premises: collective behaviour and driving factors.

Without driving factors, the market will continue to adjust indefinitely; if the driving factors are strong, then a five-wave pattern can extend indefinitely, negating the theory of a five-wave conclusion.

Technical analysis can only follow. Some suggest combining indicators for trending and ranging markets. However, technical analysis itself cannot determine whether the current or upcoming trend is single-sided or oscillating, which is its greatest dilemma.

Take moving averages as an example: if you want to capture major movements, you need to filter out noise by increasing parameters. You might catch the big move but exit too late. If you make it more sensitive to include smaller fluctuations, you lose the ability to capture major movements. There’s no middle ground; trying to find one results in missing both large and small movements.

Therefore, forward-thinking is crucial for extraordinary profits. The methods of Gann or Elliott don’t work here; current technical analysis can’t achieve this, but macro hedge funds can, which falls under macroeconomic financial forecasting.

This field can be complex or simple; it’s not about the complexity of tools but about grasping the key elements. For currency trends, we don’t predict specific numbers from a purchasing power parity perspective; we only need potential times for major movements and their end. Technical analysis can’t tell you how far a trend will go; it just lets you watch. Fundamental analysis tells you how far it can go but doesn’t instruct you on how to act.

To excel in forex trading, one must have forward-thinking, which is found in macroeconomic financial forecasting. We have been exploring this area for a long time and have found some good analytical tools through practice, which we introduce here, such as the fundamental analysis matrix.

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