Fundamental analysis is frequently used to monitor figuressuch as interest rates, unemploymentrates, gross domesticproduct (GDP), and other sorts of economic data that come out of countries to analyse movements in thecurrency market.A trader undertakinga fundamental study of the EUR/USD currency pair, for example, would find information on Eurozoneinterest rates morebeneficial than information on US interest rates. Those traders would also want to be aware of any bignews releasesfrom each Eurozone countries in order to assess the economy’s health.
Those who trade in the foreign exchange market (forex)utilize the same two types of analysis asthose who trade in thestock market: fundamental analysis and technical analysis. Technical analysis is used in forex in asimilar way: theprice is supposed to reflect all news, and the charts are examined. But, unlike firms, countries donot have balancesheets, so how can a currency be subjected to basic analysis?
As fundamental analysis is concerned with determining aninvestment’s intrinsic value, itsapplication in forex requiresdetermining the economic conditions that influence the value ofa country’s currency. We’ll take a look at some of the most important underlying elements thatinfluence a currency’smovement.
Economic indicators are reports that detail a country’s economic performance and are provided by thegovernment or aprivate entity. Economic reports are the primary tool for assessing a country’s economic health, butkeep in mind that acountry’s economic performance is influenced by a variety of circumstances and policies.
These reports are produced on a regular basis and provide market participants with information onwhether a country’seconomy has improved or deteriorated. The consequences of these reports are similar to how earningsreports, SECfilings, and other public announcements can affect stock prices. Any variation from the norm can createhuge price andvolume changes in forex, just as it can in the stock market.
These assessments are produced on a regular basis and give the market a sense of whether a country’seconomy hasimproved or deteriorated. The impact of these reports is equivalent to the impact of earnings reports,SEC filings, andother public announcements on stock prices. Any variation from the norm can produce huge price andvolume changes inforex, just like in the stock market.
Gross Domestic Product (GDP) is the ultimate measurement of a country’s economy, representing thetotal market value ofall products and services produced in a given year. Because the GDP statistic is frequently regardedas a laggingindicator, most traders concentrate on the advance report and preliminary report, which are releasedin the monthsleading up to the final GDP figures. Significant changes between these reports can result in a lot ofvolatility. Inthat they are both indices of internal growth, the GDP and the gross profit margin of a publiclytraded corporation aresimilar.
The total receipts of all retail outlets in a given country are measured in the retail-sales report.This figure isbased on data collected from a wide range of retail outlets around the country. The report is especiallyuseful as atimely estimate of overall consumer spending trends that has been adjusted for seasonal factors. It canbe used toforecast the performance of more important lagging indicators as well as gauge an economy’s immediatetrajectory.Revisions to advanced retail sales data can cause a lot of volatility. The retail sales report can belikened to apublicly traded company’s sales activity.
This report depicts a change in a country’s factory, mine,and utility production. It also givesinformation on“capacity utilization,” or how much of each factory’s capacity is being utilised. It is desirablefor a country to seean increase in production while operating at or near maximum capacity.
Traders who use this indication are mainly concerned withutility production, which can be quitevolatile due to thefact that the utility industry, and hence energy trade and demand, is heavily influenced by weatherfluctuations.Weather variations can generate significant revisions between reports, which might lead to currencyvolatility in thecountry.
The CPI tracks price changes in over 200 distinct categories of consumer goods. When compared to acountry’s exports,this report can be used to determine if a country is profiting or losing money on its goods andservices. However, keepan eye on exports – it’s a favorite topic among traders because export prices are typically affected bythe strength orweakness of a currency.
The purchasing managers index (PMI), producer price index (PPI), durable goods report, employment costindex (ECI), andhousing start are all important indicators. Not to mention the several privately published reports, themost well-knownof which is the Michigan Consumer Confidence Survey. If used correctly, all of these can be asignificant resource fortraders.
Keep an economic calendar on accessible with a list of indicators and their publication dates.Also, keep an eye on thefuture; markets frequently move in anticipation of the release of a specific indicator or report ata later date.
Be aware of the economic indicators that are attracting the mostattention from the market at any particular time. Such indicators act as catalysts for the mostsignificant price andvolume changes. When the US currency is weak, inflation is one of the most closely studied measures.
Understand what the market expects from the data, and then monitor whether those expectations aremet. That matterssignificantly more than the data itself. Occasionally, there is a significant disparity betweenexpectations and actualoutcomes. If that’s the case, be aware of the reasons behind the discrepancy.
Don’t respond to the news too hastily. Numbers are frequently released and then changed, and thingscan swiftly shift.Pay attention to these changes, as they may prove to be a useful tool for identifying trends andresponding moreeffectively to future reports.