Fundamental Analysis

Fundamental Analysis
Fundamental Analysis

In Forex trading, Fundamental analysis is the study of economic news events. Forex traders watch economic data very closely, as changes in the health of an economy can effect currency prices. As a rule of thumb, nations with strong economies will experience increased demand for their currency as businesses and individuals raise their level of investments.

Therefore, if an important news event shows economic growth was better than expected, it can lead to Forex traders quickly buying that currency on expectations that the positive data will lead to increase demand of that currency in the future. The opposite is true if results are worse than expectations.

For the most part, Forex traders focus on the major economic releases.

These include:

  • Central Bank Interest Rate Meetings: If a central bank raises its interest rate, it means that holders of that countries currency will receive higher yields for their cash investments. The higher interest rate will than attract new demand for that currency.
  • Employment Data: Although often termed a lagging indicator, employment data is the second most watched economic event. This is due to the fact that countries with growing employment levels are considered to exhibit a healthy economy.
  • Consumer Price Index (CPI): The trickiest of all economic indicators is CPI. CPI measures a country's inflation levels. Falling inflation levels will often lead to currency weakness as Forex traders view a weak CPI reading as signs that a county's economy is slowing. However, too much inflation can also be negative as may be an indication that a country's currency is being devalued. Ideally, Forex traders like to see CPI around 2-3.5%.
  • Manufacturing Production Surveys: These surveys measure whether a country is experiencing growth within its Manufacturing sector. Depending on the country and how large a component manufacturing is, changes in surverys can trigger large moves in currency prices.
  • Retail Sales: These reports follow month to month buying patterns within a country's Retail sector. Rising sales could indicate that consumers feel confident about their country's financial health and often leads to overall increase in economic growth.

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