forex fundamental analysis

Good Morning Traders,

For forex traders, forex fundamental analysis paves the way forward in deciding how and when they should trade the forex markets, and whether it’s advisable to trade a particular currency pair at that given moment, or over a certain period of time. Several factors required to carry out an actionable forex fundamental analysis are explained in this article.

What is forex fundamental analysis?

Factors such as global economic news and news events can have a direct impact on the markets. Forex markets are volatile by nature. The volatility of forex markets can increase further when news stories release important news concerning the currency markets. Typically, when news stories proclaim a positive or negative sentiment for a particular currency pair, its price movement is positively or adversely affected based upon the nature of the news.

Forex fundamental analysis involves the study of how these news-related events, economic announcements, social force, Federal policy changes, and company earnings affect the forex markets. The most important factor that affects forex technical analysis is how a country’s interest rates and policies change.

If the economy of a particular country presents a good picture, and its future economic growth exhibits a positive sentiment, it acts as a positive signal and attracts direct foreign investments.  Since more and more businesses would desire to start their business operations to earn high profits, the country “earns” money through direct investments, and this strengthens its currency in the forex markets. Boiling down to the demand and supply principle, a country with a strong and growing economy will invite more capital investment, and therefore the demand for its currency will shoot up. This makes its currency stronger as explained above. Forex technical analysis helps traders to study and analyze these factors while they trade the forex markets. 

Watch this video: Global Economic Outlook 2020(11mins 21secs)

Major economic events affecting forex fundamental analysis

As explained above, several factors play an important part in doing forex analysis. Let’s get familiar with some of the main factors that impact Forex price movements.

  • Gross Domestic Product (GDP)

The GDP report of a country is its most important economic indicator.  It provides the biggest measure of that country’s economic status. Released at 8:30 am EST on the last working day of each quarter, it exhibits the impact of how all financial activities have affected the market during that quarter. It’s an important factor to consider while doing forex technical analysis.

The GDP index is perhaps the most important factor to consider while doing a forex fundamental analysis since it can significantly impact all other forex technical analysis factors.

  • Trade Balance

It measures the difference between the imports and exports of all tangible goods and services of a country. It is an important factor affecting the GDP and it reflects a country’s economic strength.  Ideally, the total number of exports ought to surpass the imports so the net difference of exports versus imports remains on the positive side, with more capital coming into the economy rather than going out of it. The trade balance reflects the overall health of the manufacturing sector.

  • Consumer Price Index (CPI)

A CPI report is used to measure the inflation rate. It is released at 8:30 AM EST on the 15th of each month. It reflects the previous month’s data and displays the changes occurring in various consumer goods categories and services, from one month to the next. It is one of the factors considered in forex technical analysis as a good CPI index is indicative of a growing economy and strengthening the currency.

  • The Producer Price Index (PPI)

While the CPI explains which market sectors are currently growing, the PPI measures the price at which commodities and goods are sold in the market, at a wholesale-rate level. It fundamentally indicates how much consumers have to pay while buying goods in the markets. A combination of a low PPI rate and a climbing CPI rate indicates a growing economy which means the currency is becoming stronger in the forex markets and it’s safe to trade in that currency.

  • Employment Indicators

Usually, the employment announcement takes place on the first Friday of each month at 8:30 AM EST. It states and explains the unemployment rate and the current employment status of the masses i.e. the percentage of unemployed people, the total number of new jobs created in the previous month and the average number of hours worked by the employees.

This report can enhance market movements and is an important factor in carrying out forex technical analysis.

The Non-Farm Employment report or the “NFP” can greatly swing the forex markets.

  • Durable Goods Orders

The durable goods orders report concerns how much people are spending on long-term purchases, and for products expected to last for more than three years.  Released at 8:30 AM EST on the 26th each month, it offers insights into the future of the manufacturing industry and how manufacturing operations are likely to grow over time.

  • Retail Sales Index

It explains the movement of retails goods and indicates how the retail industry is growing.  The report samples a set of retail stores across the country and states the number of goods sold through large store-chains to individually operating small local stores.  It is released at 8:30 AM EST on the 12th of each month.

  • Housing Data

The housing data report shows how the housing market has grown in the previous month. It basically states the number of new homes built during the month and the total number of homes sold.  The residential construction activity is indicative of how the economic stimulus is performing in a country. It directly reflects the people’s sentiment regarding how long they intend to stay in a particular region. In many ways, it helps to identify which regions are growing and which are losing out their economy.

  • Interest Rates

They function as main drivers within the forex markets. The factors explained above are very closely watched by the Federal Open Market Committee to measure the overall economic health of the country. The Federal government uses various instruments and tools at its disposal to increase or decrease the interest rates, or leave them unchanged, to govern economic health.

Forex technical analysis VS. Forex fundamental analysis

Forex technical analysis and forex fundamental analysis form the two main streams of thoughts while trading and investing in the forex markets. While forex technical analysis involves taking a close look at the price movement of currency pairs within the market,  forex fundamental analysis focuses more on the impact of economic news and other related factors and how they affect the forex markets.

In short, 2020 will have a whole host of challenges as we move through it, and while some will happen suddenly and unexpectedly, a lot of these challenges can be predicted well in advance.

Fundamental Analysis allows us to familiarise ourselves with the current narrative of economies and currencies, and tells us which way a market may turn, which we then use technical analysis to pinpoint our entry.

Each year, a number of events are set in stone, for example in the US we have the US Election in 2020, we have the Non-Farm Payroll Reports, the FOMC Meetings, etc. Then over in Europe we have ECB (European Central Bank) Interest Rate Decisions, BoE (Bank of England) Interest Rate Decisions, and so on. Being able to predict these events is critical for any trader's success as they can be major market-moving events.

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Hopefully, you have enjoyed today’s article. Thanks for reading!

Have a fantastic day!

Nisha Patel

Live from the Platinum Trading Floor.

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