Forex Fundamental Analysis is a term that is actually very significant to know and understand if you deal with currency speculations.
When applied to Forex, it focuses on the overall state of the Economy (the top-down approach) and considers factors including; Employment, Manufacturing & Production, Earnings, Interest rates, Housing, GDP, and etc.
One must recognize the motives of why and how a particular event, for example, an increase in the Unemployment rate, influences a country’s market, which in the end shapes the level of stipulation for its currency.
The suggestion behind this type of examination is that, if a country’s present or future financial outlook is in good standing, their currency should remain strong or become stronger.
In simple terms, the better an Economy stands economically, the more spending is initiated by corporations and investors. This, in turn, fuels an expansionary economic cycle.
Weighing Economic Indicators
Understanding some components regarding fundamental analysis and indicators is important to Fx traders, because it helps them to know where properly invest their capital. Being a forex speculator means that you have to understand what information is key and what information is just rumors or false data. Certain factors affect an economy more strongly than the others.
There is a whole plethora of fundamental economic announcements that is coming up every week. However, not all indicators are created equal.
For instance, if you were a global macro trader, then the New Zealand unemployment wouldn’t be as important to you as the U.S. unemployment. While the New Zealand unemployment is certainly important for Dairy speculators in Futures markets, as the country is the biggest producer of Dairy products, nevertheless, the U.S. economy has a much larger impact on the Global Economy as a whole.
The three major factors that influence an economy are Interest rates (which are probably the most important), Employment, Foreign capital and Trade flows. It’s important to note that Inflation has a direct impact on Interest rates.
Here is the list of top Economic indicators for Global Fx Investors, when analyzing any Economy:
- Employment Indicators
- Consumer Price Index
- Manufacturing & Services
- Central Bank Minutes & Statements
- Gross Domestic Product
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The Effects of a Country’s Currency Value
One of the ways in which a country’s currency value gets influenced is through exporting goods and services. The more the country exports, whether it is goods, or services, the greater is its competitive edge.
For example, if an economy is strong in a particular sector, as Japan in Manufacturing, or Great Britain in Financial services, then these countries are more likely to export the excess abroad. Exports create jobs, bring in higher income, and increase the overall standard of living.
Exports, also, help to increase the Foreign Reserves in the nation’s Central Bank.
Here is the list of key factors that affect Exchange Rates:
Photo credit: CompareRemit.com
Also, check their great article and detailed overview of the factors here >>>
While the impact of a currency’s change on an economy is comprehensive, many fail to notice the exchange rates because most of their dealings and communication are carried out in their main currency. For most people, exchange rate differences become noticeable for circumstances such as Travel.
When performing a forex fundamental analysis, it is advisable to check the currency exchange rate; as the currency, often than not, reflects its economical and political situation. In a nutshell, here is an easy way to look at it; the higher the currency value, the better is the economy. The lower the currency value, the more it is considered to be in a bad shape.
Forex Fundamental Analysis is a prime approach to investigate the probable shifts of a currency in the course of the strong, or weak point of a particular country’s financial standing and outlook. Evidently, this is why it peaks the eye of Global Investors; as they will invest in a country’s currency if it is performing well. And in order for a country to do well, certain factors influence it in either a positive or negative way.
Have You Tried To Implement Fundamental Analysis In Your Trading?
When Evaluating A Currency… What Economic Indicators, If Any, Are You Focusing On?
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