Forex traders always trust on analysis to plan their trading strategies. There are two basic types of Forex analysis: the technical and the fundamental. With this article you will get an overview of fundamental analysis and how it is used in Forex trading.
Fundamental analysis refers to political and economic conditions which may affect currency prices. Forex traders which are using fundamental analysis rely on news reports to glean information about unemployment rates, economic policies, inflation and growth rates.
Fundamental analysis is often used to outline currency movements and to offer a comprehensive picture of economic conditions which are affecting a specific currency. Many traders trust on technical analysis for getting entry and exit points into the market and complete their findings with fundamental analysis.
Currency prices of the Forex market are affected by the strengths of supply and demand that in turn are affected by economic conditions. The two most important economic factors which are affecting supply and demand are interest rates and the strength of the economy. The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance.
Several indicators are released by government and academic resources. They are solid measures of economic health and are followed by all sectors of the investment market. Indicators are usually released on a monthly basis but a couple of are released weekly.
Two of the most important fundamental indicators are interest rates and international trade. Other indicators include the Consumer Price Index (CPI), Durable Goods Orders, Producer Price Index (PPI), Purchasing Manager's Index (PMI) and retail sales.
Interest Rates can have either a strengthening or weakening impact on a particular currency. On the one hand high interest rates draw foreign investment that will strengthen the local currency. On the other hand stock market investors often react to interest rate increases by selling off their holdings in the belief that higher borrowing costs will have a bad affect on many companies. Stock investors may sell off their holdings to cause a downturn in the stock market and the national economy.
Deciding which of these two effects will predominate depends on many different factors but there is usually an agreement amongst economic watchers of how particular interest rate changes will affect the economy and the price of a currency.
International Trade: The trade balance that shows a deficit (more imports than exports) is usually a harmful indicator. Deficit trade balances implies that money is flowing out of the country to purchase foreign-made goods and this may have a devaluing effect on the currency. Usually market expectations regulate whether a deficit trade balance is harmful or not. If a country generally operates with a deficit trade balance this has already been factored into the price of its currency. Trade deficits will only have an influence on currency prices if they are more than market hopes.
Other indicators include the CPI which is a measurement of the cost of living and the PPI which is a measurement of the cost of producing goods. The GDP measures the value of all goods and services within a country while the M2 Money Supply rates the total amount of all currency.
There are 28 major indicators which are used in the United States. These indicators have strong effects on financial markets so Forex traders should observe them when they are preparing strategies. Up-to-date information is available on many websites (on our website, too) and many Forex brokers offer this information as part of their trading service.