The concept of Fundamental Analysis

Fundamental analysis is performed on historical and present data. It is a technique that attempts to determine the value of a business by analyzing the company’s financial statements, the company’s management and competitive advantages as well as analyzing its competitors and markets. When applied in the Forex market, it focuses on the evaluation of currencies of different countries.

All of the news reports and political events that come from a specific country are used by investors to gain an idea of a country’s currency value. As a result, traders who use fundamental analysis in Forex, consider the news releases very important for their trading decisions. For example, when a trader wishes to trade the EURUSD then it is recommended to keep a close watch on announcements related to the United States and the Euro zone.

Given that there are practically unlimited Forex fundamental data, XGLOBAL Markets has identified the most important of the indicators that you need to pay attention.

Interest Rate Announcement

Interest rates decisions play a crucial role in the valuation of a country’s currency. They dictate the flows of investments. The announcements are released from the countries’ central banks with the only exception the Euro zone where the decisions related to the interest rates come from the European Central Bank and not by the countries’ member states.

Let’s assume that a trader wishes to trade EURUSD and that the interest rate in both economies (Europe and the USA) is on the same level. However, the European Central Bank decides to increase the interest rates by 5%. This creates a trading opportunity for traders to go long the EUR and go short the USD because higher interest rates attract more foreign capital and therefore they cause the exchange rate of EUR to rise against the USD.

Gross Domestic Product (GDP)

GDP is generally reported quarterly and is considered as a primary indicator of the strength of a country’s economic activity. It represents the total market value of all officially recognized final goods within a country in a given period of time. The GDP is determined in three ways – by product output, income and expenditure – all of which should in principle give the same result.

A news release of a higher than expected GDP is mostly positive for the country’s currency.

Consumer Price Index (CPI)

The CPI is probably one of the most used key indicators of inflations because large rises in CPI in a relatively short period of time typically denote periods of inflations. This measure takes into account the weighted average of prices for a specific basket of consumer goods and services.It is calculated by noting down the price changes for all goods in the basket and averaging them.

An increase in the CPI may be taken as a positive sign because people are consuming more and have more money to spend. In such cases, inflation compels the Central Banks to raise the interest rates and therefore this is considered as a positive sign for the country’s currency.

On the other hand, a rise in the CPI may not necessarily mean that the economy is getting stronger. A higher inflation means that the purchasing power of the currency is declining and there are fewer goods to be bought. In the event that wages do not increase compared to the inflation rate then the value of the country’s currency more probably will weaken against other currencies.

Employment Rate

Indicators related to employment reflect the overall health of a country’s economy. Forex traders consider employment indicators important to know because the number of jobs that are being created and the percentage of the active work force is currently working are affecting the countries’ currencies and therefore they provide large opportunities of trading profits.

One of the most famous indicators is the Non Farm Payroll (NFP) of the United States. The NFP contains approximately 80% of the workers in the United States. It excludes, however, the general government employees, private household employees, employees of nonprofit organizations and farm employees. The statistic is reported monthly (on the first Friday of the month) and is recorded and reported by the US Bureau of Labor Statistics. Assuming that there is a decrease in the payroll employment lower than expected then this is considered as a sign of a weak economic activity that could eventually lead to lower interest rates and as a result they will create a negative impact to the US Dollar against other currencies.

Retail Sales Indicators

The retail sales report is released on a monthly basis. It shows the magnitude of the consumer spending and how successful the retail stores are. It is an essential indicator of GDP in the USA and is considered as a timely indicator of broad consumer spending patterns. Traders and analysts often exclude car sales because they are expensive items and may distort the final figure.

The retail sales data is sometimes difficult to analyze. Let’s assume that the US retail sales figures were higher than expected. The buying mood of the US citizens can strengthen interest rates and this is taken as a bullish signal for the USD against other currencies. However, the strong retail sales could be negative for the USD given that many of the goods are imported from third countries. This means there was a high demand for other currencies to pay the foreign goods. This can be considered as a negative signal for the USD.

Balance Of Payments (BOP)

This indicator may be used for economic and political stability. The BOP includes the trade balance, foreign investments abroad and investments by foreigners within the country. It represents the ratio between the amounts of payments received from abroad and the amount of payments going abroad.

In case that the country has a positive BOP, this could mean that there is a significant foreign investment within the country and this is a favorable factor for growth of the country’s currency. Forex traders in such cases tend to go long in that particular currency against other currencies.

Government Fiscal and Monetary Policy

These two powerful tools are used by a government to steer the economy in the right direction. They can have similar results either by stimulating the economy and slowing the economy down when it heads up.

Fiscal policy refers to the government spending and taxing powers that create an impact on the country’s economy. On the other side, Monetary policy aims to control the economy with the ultimate goal of creating an easy money environment with a supply of credit, money and other financial assets.

Let’s assume that a country begins a program of expansionary monetary policy. This is expected to lower the interest rate of the currency. As a result, Forex traders will consider this policy as a bearish signal for the country’s currency.

Durable Goods Report

This is an economic indicator (report) that reflects the new orders placed with domestic manufacturers for delivery of durable goods ( goods used by a consumer or which has an expected life span of three years or less) in the near term or future. The indicator is released monthly by the Bureau of Census. The investors consider important to be able to recognize trends in the growth of an economy. The orders for consumer goods can indicate how busy factories are and how busy they will be in the near future.

Industrial Production

It is a measure of the country’s economic health by its output of manufacturing, mining and utility industries. The Industrial Output is released monthly by the Federal Reserve Board. Despite that these sectors contribute a small portion of the GDP they are highly sensitive to interest rates and consumer demand. The figure of the Industrial data is used by the central banks to measure inflation as the high levels of industrial production index can lead to high levels of consumption in which they may trigger a sudden rise of inflation within the country.

Purchasing Manager Index (PMI)

PMI (data) is released on the first day of the month by the National Association of Purchasing Managers. It covers five sectors: new orders, inventory levels, production, supplier delivers and employment conditions.A PMI of more than 50 represents expansion of the sectors compared to the previous month. A PMI of lower than 50 represents declining and a reading of 50 indicates no change.

Producer Price Index (PPI)

The index is one of the oldest systems of statistical data published by the Bureau of Labor Statistics and used as an indicator of the rate of inflation or deflation. PPI measures the average changes in prices received by domestic producers for their output. It looks at three areas of productions: industry-based, commodity-based and stage-of-processing-based companies. In contrast to the Consumer Price Index ( CPI) that measures price changes from the consumer’s side, PPI measures price changes from the seller’s perspective.

Existing Home Sales

The report comes out every month from the National Association of Realtors that tracks the sales of existing homes. It is considered as a lagging indicator the reason is that it comes after a change in mortgage rates. The report does not look at newly built houses or the sale of new houses The indicator is considered as a good measure of the demand in the real estate sector and the economic momentum as a whole.

Wholesale Price Index (WPI)

WPI measures and tracks the changes in the price of goods in the stages before the retail level. The Index is reported monthly to show the average price changes. Although some countries still use WPI as an inflation measure, most of the countries use PPI instead.

Productivity Report

The report details how much output each unit of labor is produced in the economy as a whole. The report is released in the second month of each quarter. Many traders tend to believe that higher productivity allows the economy to grow and increase employment cost without the risk of creating higher inflation.

Employment Cost Index (ECI)

This is an index used to monitor inflation. It is released quarterly from the U.S. Department of Labor and measures the growth of employee compensation. The ECI tracks movements in the cost of labor, including wages, fringe benefits and bonuses for employees at all levels of a company.. The reason that ECI is considered to be an indicator of inflation is when there is a wage increase, the added cost created is often passed to consumers in form of higher prices.

Factory Orders

This is a monthly report that includes durable goods, non-durable goods and the factory inventories. A change in the demand for durable goods is the most important for investors. The released of this report is monthly by the Census Bureau of the U.S. Department of Commerce one or two weeks following the durable goods orders report. For this reason, the market has already absorbed the report of Durable Goods and the indicator is not considered very important for investors.

Whats next?

Introduction to Technical Analysis

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