When it comes to the forex market, the New Zealand dollar punches well above its weight. New Zealand famously has a larger population of sheep than people, and the country’s GDP ranked just 70th among individual countries last year (behind powerhouses such as Greece, Uzbekistan and Ecuador).

As any Economics 101 student learns, the Federal Reserve is responsible for U.S. monetary policy, including setting the level of interest rates, and more recently, managing the central bank’s vast assets acquired through repeated iterations of Quantitative Easing.

It ’s often a complicated question, and when it comes to markets, the “why” often takes a backseat to the “what” that is happening and “how” it should be traded. Nonetheless, it can be worthwhile to understand why a market relationship occurs, so that you can adjust more quickly than the competition when the relationship inevitably changes.

In 2017, the pain trade was no doubt being long the euro/U.S. dollar currency pair. After predictions of euro/U.S. dollar (EUR/USD) currency pair to parity failed in 2015 and 2016, market strategists were finally poised to collect on those bets as the combination of easy monetary policy in the Eurozone and an accelerating United States economy supported by a tightening Fed made it feel inevitable that the EUR/USD would hit 1.00. Someone should have told EUR/USD traders, who instead drove the world’s most widely traded currency pair up by 1,500 pips from near 1.05 to above 1.20.

There are no two ways about it: 2017 was a brutal year for U.S. dollar bulls. By mid-December, the world’s reserve currency had fallen against every one of its major rivals on the year, losing a staggering 12% against the euro and nearly 9% versus the British pound (see “Dollar daze,” below).

After an adventurous six-month period from December to June, when the Federal Reserve raised interest rates three separate times, the U.S. central bank has shifted into neutral in the second half of 2017.

Currency trading in the coming months will require more attention to fundamental and sentiment analysis than usual.

We know that currency markets reflect a combination of fundamental, psychological and technical factors.