Forex Analysis

Currency analysis has a structural feature that separates it from every other market, and most commentary ignores it entirely.

In foreign exchange you are never forecasting a currency. You are forecasting a difference. EUR/USD is not a view on Europe; it is a view on Europe relative to the United States, compressed into a single number. This means every currency forecast contains two separate predictions bolted together, and you can be completely right about one and still lose money.

That is the lens this section applies to every pair we cover.

What actually moves major pairs

Short-term rate differentials — and their direction of travel. The yield spread between two economies is the closest thing a currency pair has to a gravitational centre. But the level matters far less than the change. A wide spread that is narrowing moves a pair more than a stable wide spread, because markets price expectations rather than conditions.

Relative economic surprise. Not whether data is good, but whether it beat what was already priced. A weak release that is less weak than feared can strengthen a currency. Traders following headline numbers alone are permanently confused by the reaction.

Terms of trade. Energy and commodity prices transfer real income between economies. Net importers and net exporters respond differently to the same price move, and this channel is chronically under-weighted in retail analysis.

Positioning. The CFTC's weekly Commitments of Traders reports break down Tuesday open interest in reportable futures and options markets. We use them to describe the distribution of reported positions by published category. The reports are delayed, the categories are broad, and CFTC staff do not know the specific reasons for traders' positions; the data are not a standalone price forecast.

Frameworks we use

Some currency behaviour only makes sense through a structural lens. The dollar smile — the observation that the dollar tends to strengthen both in global crisis and in periods of US outperformance, and to weaken in the comfortable middle — explains a large amount of otherwise contradictory price action, including why the dollar can rally on news that is unambiguously bad for the United States.

What we will not publish

We do not publish a number and a direction without a mechanism. A forecast that does not explain why a pair should move gives you nothing to act on when the market does something unexpected.

We also state what would prove a view wrong. A forecast that cannot be evaluated cannot be improved, and we consider silence about invalidation to be the most common failure in currency commentary.