When performing fundamental analysis, new traders try to read every news item and look at every economic indicator to determine what to trade. When doing it this way, they often become a bit paralyzed by too much information and end up doing nothing and getting frustrated because their hard work doesn't pay off.
Well, you don't need to know everything, but just focus on what really matters to the markets. The truth is that 90% of daily news is probably useless in relation to the bigger picture. To simplify the process, it's best to look at three main things to filter out noise:
Context
Where are we now in terms of the big macro things like monetary policy, growth, inflation, etc. For example, if global growth is expected to slow in the future, bad data from the US could actually be positive for the dollar, as it acts as a safe haven.
On the other hand, if there are expectations of positive global growth, good data from the US could actually be negative for the dollar, because amid positive risk sentiment traders and investors will take higher risks and sell the dollar.
Market focus
What is the prevailing topic at this moment? Let's say the market's focus is on the Fed's monetary policy because inflation is so high and how the Fed will act to control inflation. In this case, you have to look at what could make the Fed more aggressive in its actions or what could make it take an easier approach.
The market can also focus on something in the future and discount any bad news or data that does not change that view. If the market is focused on one particular thing because it can affect everything else, the rest is barely noticed.
What then
Always look for what comes next because the market is looking to the future. If you remember, the yen rose strongly across the board in the first half of March. This happened because we got a series of strong Japanese data and leaks about an imminent policy change from the Bank of Japan which made the market expect an early rate hike.
Once the market priced in the change, we began to see the classic “buy the rumour, sell the fact” reaction that eventually culminated in a weaker yen as the Bank of Japan actually raised interest rates as expected. In this case, I also needed to know the context because weaker US data at the beginning of March helped boost the yen but once we started getting stronger data sometime in the middle of the month, the yen started to lose value. The momentum was eventually completely reversed.
