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  Forex Education
 
 
 Introduction to the Fundamental Analysis  
 
 
 

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 about unemployment rates, economic policies, inflation, and growth rates.

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.

 
 
 

 

 
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