Like the stock market, Forex traders rely on two types of analysis: technical and fundamental. Technical analysis on the currency and stock market is the same: it is an analysis of price charts and indicators. Fundamental analysis is very different – if companies issue a number of financial reports, then countries produce a whole series of economic messages and indicators.
If it is very difficult to measure the value of one company, then what can we say about the whole country. Fundamental analysis in the foreign exchange market is very complex, and it is usually used to predict long-term trends. However, some traders trade at short-term time intervals using news releases. There are many different fundamental indicators to measure the value of a currency.
Below are a few:
– The number of jobs in the non-agricultural sector.
– Index of purchasing managers.
– Consumer price index.
– Retail sales.
– Durable goods.
These indicators are not the only fundamental indicators that can be monitored. Meetings of representatives of financial circles are held regularly, whose comments may significantly affect the markets. At these meetings, interest rates, inflation, and other problems affecting the value of currencies are often discussed. Even changes in intonation during speeches of high-ranking officials can cause increased market volatility (significant price hikes).
A simple reading of reports and the study of comments can help fundamental analysts better understand the long-term trends in the forex market, and short-term traders to profit from extraordinary events. If you choose a fundamental strategy , be prepared to keep a calendar in which the most important events (news releases) of the week will be marked. Your broker can also provide access to such information in real time.
Now that you have a general idea, let’s proceed to a more detailed study of the factors affecting the exchange rate. To analyze the value of a currency of a country, you need to weigh its economic situation well.
Economic indicators are messages that detail the economic performance of a country in a particular area. These reports are usually published periodically by government departments or private organizations. These economic reports include the most important and measurable economic factors affecting the performance of the economy.
Since they are published periodically, changes in economic indicators can be monitored for a long time. Economic reports usually have the same effect on currencies as earnings reports or company quarterly reports on stocks. In the foregn exchange market , as in most markets, if the report is very different from the expectations of economists or analysts, there is a powerful price movement.
Below are the main economic reports and indicators used in the fundamental analysis of the foreign exchange market. Many of them also have a significant impact on stock markets.
GDP is considered by many economists to be the most important indicator of a country’s economic condition. It reflects the total market value of all goods and services produced in a country for a particular year. Most traders do not pay attention to the final report on GDP, but to the advance and preliminary report on GDP, because the final report is considered a lagging indicator, that is, it confirms the trend and does not predict it, and therefore is not useful for traders. When compared to the stock market, the GDP report is very similar to the company’s earnings report for the year. They point investors and traders at growth rates over a period of time.
The retail sales report reflects total revenue, or the total value of all goods sold in retail stores in a particular country. Since consumers represent more than two thirds of the economy, this report measures the direction of the economy. Also, since this report is based on sales for the previous month, it is an operational indicator, not a lagging one, as a report on GDP. The retail sales report may cause a surge in market volatility.
The report on industrial production reports on changes in the pace of production of factories, mines and farms in the country. In this report, the most important is the utilization of production capacity, which assesses the level of production activity in the economy. Of course, a good indicator is a high level of production and capacity utilization. The capacity utilization rate, which is in the range of 82–85%, is considered large and may lead to an increase in prices or a shortage of goods in the short term. A ratio below 80% usually indicates a slowdown in the economy and the possibility of a recession.
The consumer price index is an economic indicator that measures the level of price changes in the economy, is a way to measure inflation. Using a “basket” of consumer goods, economists estimate CPI changes year after year. This indicator is one of the most important in the economy, and its publication can cause strong volatility in the stock, bond and currency markets. The threat of inflation can be a critical factor in the emergence of powerful price movements in the foreign exchange market.
This is just a brief overview of some of the most important fundamental reports that you should consider when you are a Forex market trader . There are many other factors that can affect the value of a currency.
It is important to know when economic news comes out. Keep a calendar next to you so you don’t miss an important event. Very often, markets experience increased volatility on the eve of the release of the report, which is based on market participants’ expectations.