Fundamental analysis is a method that attempts to predict the intrinsic
value of an investment. It is based on the theory that the market price of
an asset tends to move towards its ‘real value’ or ‘intrinsic value’.
Fundamental traders believe that the markets will react to events in
certain ways and that they can predict future market prices based on
these events.
Fundamental analysis in Forex entails predicting the price valuation of a
currency and its market trends by analyzing current economic conditions,
government policy and societal factors within a business cycle
framework.
Forex Traders gauge a country’s economic state by examining
macroeconomic indicators. When properly used, these indicators can be
an invaluable resource for any Forex trader. After publication of these
indicators we can observe volatility of the market. The degree of
volatility is determined depending on the importance of an indicator.
That is why it is important to understand which indicator is important and
what it represents.
When properly used, these indicators can be an invaluable resource for
any Forex trader. After publication of these indicators we can observe
volatility of the market. The degree of volatility is determined depending
on the importance of an indicator. That is why it is important to
understand which indicator is important and what it represents.
Some important economic indicators(Economy Calendars or hot News) which are listed below:-
- Interest Rate Announcements
- GDP(Gross Domestic Products)
- CPI
- Employment
- Retail Sales
- Balance of Payments
- Government Fiscal policy and monetary policy Announcements
Interest Rates Announcement:
Interest rates play the most important role in moving the prices of
currencies in the foreign exchange market. Interest rates dictate flows of
investment. Since currencies are the representations of a country’s
economy, differences in interest rates affect the relative worth of
currencies in relation to one another. When central banks change interest rates they cause the forex market to experience movement and volatility
and accurate speculation of central banks’ actions can enhance the
trader’s chances for a successful trade.
Gross Domestic Product (GDP):
The GDP is the broadest measure of a country’s economy, and it
represents the total market value of all goods and services produced in a
country during a given year. Since the GDP figure itself is often
considered a lagging indicator, most traders focus on the two reports that
are issued in the months before the final GDP figures: the advance report
and the preliminary report. Significant revisions between these reports
can cause considerable volatility.
Consumer Price Index(CPI):
The Consumer Price Index (CPI) is probably the most crucial indicator of
inflation. It represents changes in the level of retail prices for the basic
consumer basket. If the economy develops in normal conditions, the
increase in CPI can lead to an increase in basic interest rates. This, in
turn, leads to an increase in the attractiveness of a currency.
Employment Indicators:
Employment indicators reflect the overall health of an economy or
business cycle. In order to understand how an economy is functioning, it
is important to know how many jobs are being created or destructed,
what percentage of the work force is actively working, and how many
new people are claiming unemployment.
Retail Sales:
The retail sales indicator is released on a monthly basis and is important
to the foreign exchange trader because it shows the overall strength of
consumer spending and the success of retail stores. It can be used to predict the performance of more important lagging indicators, and to
assess the immediate direction of an economy.
Balance of Payments:
The Balance of Payments represents the ratio between the amount of
payments received from abroad and the amount of payments going
abroad. If coming payment exceeds payments to other countries and
international organizations the balance of payments is positive. The
surplus is a favorable factor for growth of the national currency.
Government Fiscal and Monetary policy:
Stabilization of the economy (e.g., full employment, control of inflation,
and an equitable balance of payments) is one of the goals that
governments attempt to achieve through manipulation of fiscal and
monetary policies. Fiscal policy relates to taxes and expenditures,
monetary policy to financial markets and the supply of credit, money, and
other financial assets.
There are many economic indicators, and even more private reports that
can be used to evaluate the fundamentals of forex. It’s important to take
the time to not only look at the numbers, but also understand what they
mean and how they affect a nation’s economy.
