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.
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
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.