Most Forex traders use technical analysis to trade on forex/stocks, but more sophisticated and successful traders tend to increase their success rate by using fundamental analysis in their trading decisions. In this article, we find out more about fundamental analysis, how to get important data, and how to use it.
What is the Fundamental analysis?
While technical analysis involves examining charts to identify patterns or trends, fundamental analysis involves examining economic data reports and news headlines. (And even random tweets from a particular world leader) Fundamental analysis is a way of looking at the Forex market by analyzing the economic, social, and political forces that may affect currency prices.
If you think about it, it makes perfect sense! Just like economics, it is supply and demand that determine prices and exchange rates.
It is easy to use supply and demand as an indicator of where the price can go. The hard part is analyzing all the factors that affect supply and demand.
In other words, you have to look at different factors to determine which country’s economy is doing well and which country’s economy is doing badly. With its help, you can have a view of prices in the future. You can say a cheap asset is being traded or it is already expensive and has a bubble.
You need to understand the reasons why and how certain events, such as rising unemployment, affect a country’s economy and monetary policy, which ultimately affect the level of demand for that country’s currency.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, that country’s currency will be more powerful. The better a country’s economy is, the more foreign businesses and investors will invest in that country. This leads to the need to buy that country’s currency to acquire that asset.
In short, this is the fundamental analysis: a good economy equals a good currency and a bad economy equals a declining currency
For example, when we say that the US dollar is rising because the US economy is recovering.
Note: As the economy improves, inflation will rise, and central banks may raise interest rates to control this growth and inflation.
Next, you will learn how economic data and inflation information reflect the economy.
Rising interest rates make financial assets more attractive, and traders and investors must buy that currency to acquire these lovable assets. This increases the demand for currency.
For example, suppose in your country the interest on bank accounts is 2% per annum. What will you do when a country has a bank interest rate of 3.5% ?? Here is the answer
To be able to use fundamental analysis, it is essential to understand how economic, financial, and political news affects the exchange rate. This requires a good understanding of macroeconomics and geopolitics.
Do not be afraid of words. It is enough to have a general understanding of this economic data to be able to predict potential price movements. You will learn more.
Since fundamental analysis is about examining the intrinsic value of an investment, its application to Forex requires examining the economic conditions that affect the value of a country’s currency. Here we look at some of the key factors that play a role in the currency movement.
Now, How can find this fundamental data, and how to learn it?
Indicators and economic data:
Economic indicators are reports published by a government or a private organization that details a country’s economic performance. Economic reports are a tool by which a country’s economic health is directly measured but keep in mind that many factors and policies affect a country’s economic performance.
These reports are published at scheduled times and show the market whether a country’s economy has improved or shrunk. The effects of these reports are comparable to how income reports, SEC records, and other publications may affect securities. In the Forex market, like the stock market, any deviation from the standard can cause large price and volume changes.
You may be familiar with some of these economic reports, such as unemployment data, but other statistics, such as housing statistics, are covered and less considered. However, each indicator pursues a specific goal and can be useful.
Now we will introduce these indicators:
Gross Domestic Product (GDP)
Gross domestic product is considered the broadest measure of a country’s economy and reflects the total market value of all goods and services produced in a country during a given year. Because GDP itself is often considered a backward indicator, most traders focus on two reports published in the months before the final GDP figures: the preliminary report and the preliminary report. The high difference between the previous figures and the predicted figures can cause significant fluctuations. GDP is somewhat similar to the gross profit margin of a public company because both are measures of domestic growth.
Positive and rising GDP is bullish
The Retail Report identifies the statistics received by all retail stores in a country. This report is especially useful as a timely indicator of consumer spending patterns that are adjusted for seasonal variables. It can be used to predict performance and evaluate the economy. Differences in previous and current reports as well as differences with the projected figure can cause significant fluctuations. A retail report that shows the sales of stores across a country can be compared to the sales activity of a public company. The above figures show good sales and high income of companies and consequently higher inflation.
Rising retail sales is bullish for the currency
This report shows the change in the production of factories, mines, and facilities within a country. It also reports the capacity utilization of each plant. It is ideal for a country to see an increase in production while at or near-maximum capacity utilization.
Traders using the index are often concerned about output and the price of utilities, which in turn will greatly affect trade and energy demand. Significant changes between reports can cause the country’s currency to fluctuate.
Slowing industrial production can lead to less employment, a reduction in the GDP, and signal an economic contraction. so
lower released data is bearish for the currency
Consumer Price Index (CPI)
The CPI measures changes in the prices of about 200 different consumer goods. This report, when compared to a country’s exports, can be used to see if a country is making a profit or loss on its products and services. However, be careful when considering exports – this is a concern for many traders because export prices often vary according to the strength or weakness of a currency.
Other key indicators include Purchasing Managers’ Index (PMI), Producer Price Index (PPI), Durable Goods Index, Employment Cost Index (ECI), and Housing Start. And don’t forget the many reports from private companies, the most famous of which is the Michigan Consumer Trust Survey. All of these, if used properly, provide a valuable resource for traders.
Rising CPI or PPI is considered bullish because it makes an interest rate hike more likely
The price governments and companies pay for labor. When the prices for goods that companies have to pay rise, it is usually passed on to the consumer and it could lead to a rise in consumer prices (CPI). Thus, the hourly earnings numbers are used to make decisions about interest rates because it reflects inflation. A rise in earnings can also lead to more consumer spending which is also considered bullish.
When the actual numbers be higher than forecast, it is generally good for the currency
The value of building permits for the construction of new houses. Building permits are considered a leading economic indicator because a rise in building permits can foreshadow rising demand for construction, material, and labor when the actual construction of the homes starts. When the actual numbers beat the forecast, it is generally considered bullish.
A higher number is bullish for the currency
FOMC meeting is the highest important event on the forex calendar and can lead to a lot of volatility and market prices. During the FOMC meetings, monetary policies are being discussed. During the FOMC meeting, the participants also vote about potential interest rate decisions (raising or lowering interest rates) and also provide a potential outlook of the economy.
A survey of purchasing managers in the manufacturing industry. The survey includes business activities, employment, production, orders, prices, and supplier deliveries. Purchasing managers are highly informed and the outcome of the survey is considered a leading economic indicator about the health of the manufacturing industry and the economy as a whole.
Positive data suggest a healthy and growing economy that is bullish
NFP – Nonfarm payrolls
NFP data shows the employment numbers of paid workers in the US, excluding government employees, private household employees, and farm employees. The NFP is released monthly and provides information about the health of the economy. The NFP numbers can also serve as a proxy for how likely government activity is
Higher value is good for currency
The unemployment claims show how many people have filed for unemployment. Unemployment claims is an important number because it also affects consumer spending behavior and shows the state of the economy.
A higher number is considered bearish
Use of economic index
Because economic indicators measure a country’s economic situation, changes in reported conditions directly affect a country’s price and money supply. However, it is important to keep in mind that the indicators discussed above are not the only ones that affect currency prices. Reports from important people, speeches, tweets of senators and representatives of the country, political tensions, and many technical factors can also greatly affect the value of a currency. When doing fundamental analysis in the Forex market:
Have an economic calendar available that lists the indicators and when they were published. Also, be careful about the future. Most markets move in anticipation of a specific indicator or report to be released at a later time and push the price forward. But if the report or what was expected was different, the fluctuations will intensify.
Find out the economic indicators that are attracting more and more market attention at any given time. Such indicators are the catalyst for most price and volume movements. For example, when the US dollar is weak, inflation is often one of the indicators.
Know the market expectations for the data and then pay attention to meeting the expectations. This is much more important than the data itself. Sometimes, there is a huge difference between expectations and actual results. If so, be aware of the possible justifications for this difference.
Do not react to the news too quickly. Most numbers are published and then corrected and everything can change quickly. Pay attention to these corrections, as they may be a useful tool for monitoring trends and responding more accurately to future reports.
On the Ziwox terminal, you can find the fundamental analysis and the final result of the analysis for every currency.
It is an overview of currency pair fundamental analysis based on economic news and currency economy outlook. It shows you whether the current bias is Bullish or Bearish with a power stretch. This indicator shows the currency’s potential to grow or decline in futures and power/stretch shows the speed of these changes.