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March 21, 2022

LMFX, What to expect from Oil price amid the Russia-Ukraine situation?

US have already taken action to cut dependence on Russian Oil. What to expect now?

WTI corrects to lower grounds

WTI could be heading for its second week in red territory. Even though the commodity surged to a new multiyear high on the 8th of March its correction to lower grounds in the following daily sessions, was substantial and the ground lost was very evident. In this report we will be taking a closer look into the current most important fundamental updates in the Oil market and how these can affect prices in the short term. Along with the fundamentals we will also present a technical analysis pointing out trade related information for WTI.

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What to expect from Oil prices?

At the moment, the Oil market continues to focus on Russia’s contribution to the global Oil market supply. Even though countries like the US have already taken action to cut dependence on Russian Oil, it is still uncertain who will step in and cover for the lost production. Some analysts are currently reducing Oil demand expectations in the near future, as Oil prices where extremely high in the past weeks making purchases somewhat unaffordable and uneconomical. Moreover, contradicting information on the Ukraine war seems to have led to mixed signals in the past days, with some media sources pointing to improved talks between the two sides while on the other hand Russian military attacks may have worsened in the current week. However, the ongoing developments of the matter in the past weeks, may have forced the Oil market volatility to extraordinary levels.

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Key Fundamental Analysis

Fundamental analysis is a method of price analysis for determining financial assets by analyzing political as well as economic activity and current conditions.

In fact, in countries all over the world, macro factors such as virtual economy, real economic activities and political environment are interconnected, and the value of the currency will also be affected by macro factors. Below we will learn the interrelationships between the various factors in fundamental analysis.

Compared with other economic analysis methods, the fundamental analysis method is a very complex economic analysis method in the financial market. In fundamental analysis, the same factors affect the market differently under different market conditions. Sometimes important economic factors appear insignificant in some cases. Fundamental analysis requires not only a solid economic theory but also market judgment experience.

Fundamental analysis is often used by investors in conjunction with other market analysis methods. Fundamental analysis is very practical in actual transactions and can be an important basis for analyzing currency exchange rate fluctuations and the impact of economic factors on exchange rates.

In fundamental analysis, we often consider the following factors:

  • Political crisis;
  • Significant changes or dissolution of members of the Prime Minister’s Cabinet;
  • Negative media coverage;
  • Publication of national (foreign) macroeconomic indices;
  • Major international events;
  • Government elections;
  • Natural disasters (force majeure).

All of the above events can be used for fundamental analysis. They can be roughly divided into two categories: “planned events” and “unplanned events”. All “planned events” (including the announcement of economic indicators, planned speeches by cabinet ministers or key officials, the announcement of election results, etc.) are scheduled in the economic calendar. “Unplanned events” are events that cannot be predicted or controlled (including fires, natural disasters, terrorist attacks, etc.). In addition, the fundamental analysis argues that political events lead to a reallocation of public resources and capital and that the impact of such a distribution on the economy is particularly profound.

From a fundamental analysis perspective, the market’s reaction to “unplanned events” in different situations is unpredictable. There have been events in history (Caribbean oil collapse, Saddam’s arrest, Hurricane Katrina disaster, etc.) that have caused the dollar to change dramatically in just an hour.

Nonetheless, exchange rate fluctuations in currency trading instruments can be predicted by looking at macroeconomic indicators. To give an example: the impact of changes in the statistics of the unemployment rate on the current exchange rate of the country’s currency is obvious. Therefore, there are certain principles for the intervention of macroeconomic indicators in the foreign exchange market.

We recommend that you refer to the economic calendar when trading forex so that you can make the right analysis when economic events occur.

You can find the economic calendar in LMFX’s Official Website.

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Looking at the macroeconomic data

The macroeconomic data released by the world’s leading countries can affect the exchange rate of currencies to varying degrees. Next, we divide the macroeconomic data into the following groups according to their severity:

1. Dominant exchange rate factors

  • Gross Domestic Product; (GDP)
  • Trade balance
  • Balance of Payments
  • Inflation data (CPI and PPI);
  • Unemployment data;
  • Money supply data (M4-M0);
  • Discount rate;
  • Congressional elections, presidential elections (including election manifestos, and the impact of the electoral party’s ruling history on the currency);

2. Secondary exchange rate factors: Sometimes real economic factors can also cause exchange rate fluctuations

  • Sales performance in the retail industry;
  • The real estate industry;
  • Orders for manufacturing and substitutes;
  • Industrial Manufacturing Index (IPI);
  • Producer Price Index (PPI);
  • Consumer Price Index (CPI);
  • The overall level of economic productivity.

3. Other exchange rate factors:

  • Futures market;
  • Deposit rate;
  • Stock market indices (Nikkei, Dow Jones, German DAX) – the rise of such indices is seen as a signal of the country’s economic growth. The rise of the index drives the demand for the national currency;
  • Price fluctuations of government bonds (e.g. Treasury bills and long-term Treasury bills);

As we said before, the release of fundamental economic data is a predictable event. Under current international agreements, countries with strong economies are responsible for publishing real-time economic indicators and forecasts for their respective countries. What we need to keep in mind is that the market will make timely and strong adjustments to forecasts or changes in economic indicators. Therefore, future forecasting of financial markets often requires investors to accumulate more experience.

Sophisticated investors generally analyze and weigh market fundamentals and technical trading strategies comprehensively. If an investor only focuses on fundamental analysis, he will often suffer losses by ignoring the real-time fluctuations of the market. In addition to careful analysis of economic indicators when fundamental data is released, investors also need to pay attention to the historical impact of data on financial markets.

Let’s look at an example:

The U.S. unemployment data (published every two weeks) shows that the current unemployment rate is 418,000, which is down from the first half of the month (515,000) and also below the expected level (452,000). Relative to expectations, the actual unemployment figures were good news. The reduction in the unemployment rate shows that the current economy in the United States is improving. Affected by this, the dollar will strengthen against other currencies (generally about half of the current price chart). After the dollar price starts to fluctuate, the market may have a review of the employment data for the first half of the month, in which the unemployment data for the first half of the month may become 468,000. At this point, we find that the expected unemployment rate is not much different from the actual data in the first half of the month, and the reverse market will pull the dollar price back to its previous level. Such a situation generally occurs when multiple major macroeconomics are announced at the same time, and the volatility of the relevant currency will rise sharply. After the market game, the currency will return to the state it was in before the macro news was released.

What investors need to understand is that different macroeconomic factors affect the price of financial investment products at different times. As an example, the relationship between discount rates set by central banks. The discount rates of central banks directly affect price fluctuations between currencies of different countries. A country with a higher discount rate has more investment value in its currency. If a country’s discount rate changes, investors will reassess the value of that country’s currency and may invest in another currency. The same phenomenon also occurs in the stock CFDs of the world’s leading companies: investors predict the direction of stock price fluctuations in the short term (usually within a month) by analyzing the short-term profitability of the company.

Finally, you are welcome to visit the study materials recommended by LMFX Official Website, where you will find more comprehensive knowledge and application of foreign exchange fundamental analysis.

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