Many
traders in the Forex market use Forex trading
fundamental analysis techniques to predict long-term
economic trends that will affect a currency pair and
believe that it is not a technique that suits short-term
Forex traders.
However,
the dedicated Forex trading professional who keeps
up-to-date on the data used to predict these long-term
trends can also easily become adept at spotting
"mini-trends" that become obvious when the collected
data is analyzed.
Fundamental
analysis refers to political and economic conditions
that may affect currency prices. Forex traders using
fundamental analysis rely on news reports to gather
information ab
The
use of fundamental analysis in Forex trading requires
you to analyze economic indicators such as Inflation
Rate, Unemployment Rate, Interest Rates, Gross National
Product (GNP), Retail Sales, Consumer Price Index (CPI),
Non-Farm Payroll, and the sales of Durable
Goods.
Currency
prices on the FOREX are affected by the forces of supply
and demand, which in turn are affected by economic
conditions. The two most important economic factors
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.
Economic
Indicators
Economic
indicators are released by government and academic
sources. They are reliable measures of economic health
and are followed by all sectors of the investment
market. Indicators are usually released on a monthly
basis but some 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 effect on a
particular currency. On the one hand, high interest
rates attract foreign investment which 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 adversely affect many companies.
Stock investors may sell off their holdings causing a
downturn in the stock market and the national
economy.
Determining which of these two effects
will predominate depends on many complex factors, but
there is usually a consensus amongst economic observers
of how particular interest rate changes will affect the
economy and the price of a
currency.
International Trade – Trade balance
which shows a deficit (more imports than exports) is
usually an unfavorable indicator. Deficit trade balances
means that money is flowing out of the country to
purchase foreign-made goods and this may have a
devaluing effect on the currency. Usually, however,
market expectations dictate whether a deficit trade
balance is unfavorable or not. If a county habitually
operates with a deficit trade balance this has already
been factored into the price of its currency. Trade
deficits will only affect currency prices when they are
more than market expectations.
There are 28 major
indicators used in the United States. Indicators have
strong effects on financial markets so Forex traders
should be aware of them when preparing strategies.
out unemployment rates, economic policies,
inflation, and growth rates.