Price doesn't move randomly. It moves toward equilibrium, disrupted by economic reality. While beginners see chaotic green and red candles, professionals see cause and effect. GDP beats expectations → currency strengthens. Central bank hints at rate hikes → capital flows accelerate. Understanding WHAT moves price transforms you from a chart watcher into a market analyst.
Welcome to Lesson 6
You've mastered the mechanics. But here's the reality check:
Knowing HOW to trade means nothing if you don't know WHY price moves.
The Professional Difference: Retail traders focus 100% on technicals and ignore fundamentals. Professional traders check the economic calendar every morning and either avoid trading around high-impact news or position themselves WITH the fundamental bias. Fundamental awareness isn't optional—it's survival.
Lesson Chapters
1Chapter 1: Supply and Demand⏱️ ~2 min
The price of everything, including currency pairs, is determined by Supply and Demand.
The Basic Mechanism
Demand Greater Than Supply:
- Excess demand (buyers) for a currency
- Currency's value rises
- Buyers must bid higher to acquire limited supply
Example:
- Strong US economic data releases
- Global investors want USD to invest in US assets
- USD strengthens (EUR/USD falls, USD/JPY rises)
Supply Greater Than Demand:
- Excess supply (sellers) compared to demand
- Currency's value falls
- Sellers accept lower price to offload excess
Example:
- Weak UK economic data releases
- Investors sell GBP to move capital elsewhere
- GBP weakens (GBP/USD falls, EUR/GBP rises)
The Currency Market Application
Currency Price Movement = Function of Supply/Demand Imbalance
All other factors (economic reports, political news, central bank actions) are simply catalysts that shift the Supply/Demand balance.
Professional Understanding:
- Technical analysis shows WHERE supply/demand zones are
- Fundamental analysis shows WHY supply/demand is shifting
- Both are necessary for complete market view
Professional Insight: Supply and demand in forex aren't abstract—they're actual buy and sell orders in the market. When you see a bullish Order Block, that's massive institutional demand that overpowered supply. Technicals reveal supply/demand history. Fundamentals predict future imbalances.
2Chapter 2: Economic Fundamentals⏱️ ~3 min
Economic Fundamentals measure the financial health of a country. A strong economy attracts global investment, increasing demand for its currency.
The Major Economic Indicators
Gross Domestic Product (GDP)
What It Measures: Total value of all goods and services produced
Frequency: Quarterly (every 3 months)
Impact:
- High GDP growth (3%+) = Strong economy → Currency strengthens
- Low GDP growth (below 1%) = Weak economy → Currency weakens
- Negative GDP (recession) = Very weak → Currency crashes
Consumer Price Index (CPI) - Inflation
What It Measures: Rate at which prices are rising for consumers
Frequency: Monthly
Impact:
- High CPI (above 3%) = High inflation → Central bank may raise rates → Currency strengthens
- Low CPI (below 1%) = Low inflation → Central bank may cut rates → Currency weakens
Why It Matters: Central banks target 2% inflation. Deviations force policy changes.
Employment Data (Non-Farm Payrolls - NFP)
What It Measures: Number of jobs added/lost (excluding farm workers)
Frequency: Monthly (first Friday, 8:30 AM EST)
Impact:
- Strong jobs growth (200k+ jobs) = Healthy economy → Currency strengthens
- Weak jobs growth (below 100k) = Weak economy → Currency weakens
- Job losses (negative) = Recession fears → Currency crashes
Why It's King: Employment = consumer spending = economic growth. NFP is the most watched indicator.
Example:
- NFP expected: 180k jobs
- NFP actual: 340k jobs (massive beat)
- USD surges +150-200 pips in 30 minutes
Retail Sales
What It Measures: Consumer spending (70% of GDP in developed economies)
Impact:
- Strong retail sales = Confident consumers → Currency strengthens
- Weak retail sales = Cautious consumers → Currency weakens
The Anticipation Factor
Critical Concept: The market often moves before the official release.
The Process:
1-2 Weeks Before:
- Analysts publish forecasts
- Institutions position based on predictions
- Price begins moving in anticipated direction
Day of Release:
- If actual = expected: Price may not move much (already priced in)
- If actual beats/misses: Violent reaction to correct the misprice
3Chapter 3: High-Impact News Events⏱️ ~3 min
High-Impact News Events provide short-term volatility and often confirm or reverse existing trends.
The Major News Categories
Central Bank Decisions (Highest Impact)
Events:
- Interest rate announcements
- Monetary policy statements
- Central bank press conferences
- Quantitative easing programs
Impact: Can move pairs 200-300+ pips
Example:
- Federal Reserve raises rates by 0.50% (hawkish)
- USD surges across all pairs
- EUR/USD drops 250 pips in 2 hours
Economic Reports (High Impact)
Key Reports:
- GDP (quarterly)
- CPI/Inflation (monthly)
- Non-Farm Payrolls (monthly)
- Retail Sales (monthly)
- Manufacturing PMI (monthly)
Impact: 50-150 pip moves typical
Political Events (Variable Impact)
Events:
- Elections (presidential, parliamentary)
- Trade disputes (tariffs, sanctions)
- Budget crises (government shutdowns)
- Geopolitical conflicts
Impact: Creates uncertainty → Flight to safe havens
Example:
- Brexit referendum results (June 2016)
- GBP crashed -800 pips in 12 hours
The Economic Calendar
Professional Tool: Economic calendars (ForexFactory, Investing.com, Bloomberg)
What They Show:
- Date and time of release
- Currency affected
- Importance (Low, Medium, High)
- Previous, Forecast, Actual values
How to Use:
Before Trading Day:
- Check calendar for high-impact events
- Note times (convert to your timezone)
- Plan: Trade before, avoid during, or trade after
High-Impact Event Protocol:
- Option 1: Close all positions 30 min before release
- Option 2: Move all stops to breakeven
- Option 3: Don't trade at all that day
- Option 4 (Advanced): Trade the post-news trend (15-30 min after)
Never: Hold a tight stop through NFP/CPI/Fed decision. Spread widens, slippage is extreme, stop hunts are guaranteed.
4Chapter 4: Interest Rates and Central Banks⏱️ ~3 min
Central Banks (Federal Reserve, ECB, Bank of England, Bank of Japan) are the most powerful entities in forex because they control interest rates and monetary policy.
The Interest Rate Effect
The most critical fundamental concept is the direct link between interest rates and currency demand:
The Chain Reaction:
Step 1: Central Bank Raises Rates
- Example: Fed raises rates from 2.0% to 2.5%
Step 2: Bonds Become More Attractive
- US Treasury bonds now yield 2.5% (vs. 1.5% in Europe)
- Higher return on USD-denominated assets
Step 3: Capital Inflows
- Global investors sell EUR, buy USD
- Need USD to invest in US bonds
- Massive demand for USD
Step 4: Currency Appreciates
- USD strengthens across all pairs
- EUR/USD falls (takes less USD per EUR)
- USD/JPY rises (receive more JPY per USD)
The Interest Rate Differential
The Concept: Currencies with higher interest rates attract capital from currencies with lower rates.
Example:
Interest Rates (2024):
- US Fed Funds Rate: 5.50%
- ECB Deposit Rate: 4.00%
- Differential: +1.50% in favor of USD
Market Response:
- Capital flows from EUR to USD
- EUR/USD trends downward (USD strengthening)
- Carry traders borrow EUR (cheap) to buy USD (high yield)
The Carry Trade
Definition: Borrowing a low-interest rate currency to buy a high-interest rate currency, profiting from the interest differential.
Example:
- Borrow JPY at 0.10% (Bank of Japan rate)
- Buy AUD at 4.35% (Reserve Bank of Australia rate)
- Profit: 4.25% annual interest differential
- Plus: Any appreciation of AUD vs. JPY
Market Impact:
- Creates sustained demand for high-yield currencies (AUD, NZD)
- Creates sustained supply of low-yield currencies (JPY, CHF)
- Produces multi-month trends
5Chapter 5: Summary, FAQs & Quiz⏱️ ~3 min
Summary
The movement of forex prices is a logical function of Supply and Demand, constantly shifted by three primary factors:
Key Principles (0/4)
The Universal Truth: Check the economic calendar daily. Avoid trading through high-impact news. Align your technical setups with the fundamental bias.
Frequently Asked Questions
Q1: Which economic report causes the most volatility in USD pairs?
The US Non-Farm Payrolls (NFP) report, released on the first Friday of every month at 8:30 AM EST.
Typical NFP Impact:
- EUR/USD: 80-150 pip move in first 30 minutes
- GBP/USD: 100-180 pip move
- USD/JPY: 80-120 pip move
- Spread widens from 0.5 pips to 5-10 pips
- Slippage: 5-15 pips common
Professional Protocol: Avoid trading 30 min before to 15 min after NFP.
Q2: Why does a currency often weaken after good news is released?
This is the classic "Buy the rumor, sell the fact" phenomenon.
The Mechanism:
Weeks Before:
- Market expects good GDP report
- Institutions buy currency in anticipation
- Price rises 100+ pips (pre-positioned)
Day of Release:
- GDP beats expectations (good news)
- Institutions take profits (sell)
- Price drops 50 pips (profit-taking)
Lesson: The move often happens BEFORE the news, not after.
Q3: What is a safe-haven currency?
A safe-haven currency is one that investors flock to during times of global uncertainty.
The Big Three:
- US Dollar (USD): World reserve currency
- Japanese Yen (JPY): Large trade surplus
- Swiss Franc (CHF): Political neutrality
What Causes Flight to Safety:
- Stock market crashes
- War or terrorism threats
- Banking crises
- Economic recession fears
Quiz
If demand for the Australian Dollar (AUD) suddenly exceeds supply, what will happen to the AUD's value?
The single most powerful tool controlled by Central Banks that directly influences currency value is the:
Which term describes positioning based on anticipated news, causing the actual news release to have diminished impact?
A sharp spike that breaches support but quickly reverses, often due to institutional liquidity harvesting, is best described as:
If the ECB raises interest rates while the Federal Reserve keeps rates unchanged, what is the most likely impact on EUR/USD?
Call to Action
You now understand that price movement is a direct reflection of economic reality and market expectation.
Align with Economic Reality
Practice fundamental awareness on a demo account. Learn to check the economic calendar before trading, avoid high-impact news periods, and align your technical setups with fundamental biases.
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Proceed to Next Course: Technical Analysis Foundations
Prerequisites
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