Fundamental Analysis

By examining the economic, social, and political factors that might have an impact on currency prices, fundamental analysis is another technique to view the forex market. Examining economic data reports and news headlines is a crucial part of fundamental analysis.

You must comprehend the causes of and mechanisms by which certain occurrences, such as an increase in the unemployment rate, impact an economy and monetary policy, which in turn impacts the degree of demand for that nation’s currency.

According to the logic behind this kind of study, if a nation’s present or long-term economic prospects are favorable, its currency ought to appreciate.

More international businesses and investors will invest in a nation whose economy is in better shape. As a result, in order to acquire those assets, one must buy that nation’s currency.

Interest Rates Example:
Higher interest rates make dollar-denominated financial assets more attractive. As a result, the U.S. dollar’s value will probably rise in comparison to other currencies that are less in demand. Currency performance is always compared to that of another currency since currencies are always linked.

Economic Indicators

An economic indicator is a piece of data that analysts use to analyze existing or potential investment opportunities. These data are often of a macroeconomic scale. The general health of an economy can also be determined using these measures.

Economic indicators can be anything an investor wants them to be, but certain information made public by the government and nonprofits has gained widespread attention. These signs could be, but are not restricted to:

1. Inflation (Consumer Price Index)
2. GDP (Gross Domestic Product or Growth Rate)
3. Unemployment Rate
4. Trade Balance

Types of Economic Indicators

Leading Indicators:

1. Leading indicators used to forecast an economy’s future trends include the yield curve, consumer durables, net business formations, and share prices.
2. The name of this category refers to the fact that the figures or data on certain financial benchmarks will fluctuate or change before the economy.
3. These indicators should be used with caution because they can provide inaccurate information.

Lagging Indicators

1. Lagging indicators only appear after a certain economic activity has taken place, such as the gross national product (GNP), the CPI, unemployment rates, and interest rates.
2. These data sets, as their name suggests, display information following an event.
3. A technical indicator called a “trailing indicator” follows significant economic movements.

Coincident Indicators

1. Coincident indicators are seen in conjunction with the occurrence of particular economic activity and include things like GDP, employment levels, and retail sales.
2. This group of metrics displays an area or region’s activity.
3. Many economists and policymakers keep track of this real-time data.

Central Banks Policies

In order to promote long-term economic growth and contribute to the general stability of the financial system, central banks are primarily responsible for maintaining inflation. When necessary, central banks will act in the financial markets in accordance with the established “Monetary Policy Framework.”

Since they want to profit from the ensuing currency swings, forex traders closely watch and anticipate the adoption of such policies.

What Is A Central Bank?

Central banks are autonomous organizations that are used by countries all over the world to help manage their commercial banking sector, determine central bank interest rates, and advance financial stability across the nation.

The following are some strategies used by central banks to intervene in the financial market:

1. In order to increase or decrease the amount of money in the banking system, governments purchase and sell government securities (bonds) in the open market. This procedure is known as “open market operations” (OMO).
2. The monetary policy committee determines the central bank rate, often known as the discount or federal funds rate, with the goal of boosting or lowering economic activity. Although it may seem counterintuitive, central banks try to keep inflation at a moderate level because it is a direct result of an overheated economy.
3. Additionally, central banks serve as lenders of last resort. If a government fails to obtain money through a bond auction and has a moderate debt to GDP ratio, the central bank may be able to lend the government money to make up for its short-term liquidity constraint.

Investor trust is raised when a central bank serves as the lender of last resort. Investors are more confident that governments will honor their debt obligations, which helps to reduce the cost of borrowing money for the government.

Which Central Banks To Follow?
As a trader in the Fx market, you should always follow the major central banks’ decisions around the world.

1. The Federal Reserve (USA)
2. European Central Bank
3. Bank of England
4. Bank of Japan
5. Reserve Bank of Australia
6. Reserve Bank of New Zealand
7. Bank of Canada
8. Peoples Bank of China

Example of Bank of Japan intervention

The US Dollar had a wild rally in 2022 since the Federal Reserve in the US decided to raise the Fed Fund Rate aggressively throughout the year, leading USDJPY to rise sharply to 151.80. Such volatility forced the Bank of Japan to intervene to stop the Japanese Yen declines. The moment the decision was announced, USDJPY declined from 151.80 all the way down to 145.80 within an hour.

Let’s calculate the potential profit if you were betting on such an intervention. Let’s say that you had 1 contract of USD/JPY (Short), which means that you would want USDJPY to decline in order to make profit. The decline from 151.80 to 145.80 would’ve yielded 600 pips = $600 if you were trading mini lots.

Trade The News

Being able to trade currencies at any time of day or night, five days a week, is one of the many benefits (from Sunday, 5 p.m. until Friday, 4 p.m. ET).

Economic data is frequently the most significant motivator for short-term swings because markets move as a result of news. This is especially true in the currency market, which reacts to both domestic and international news in addition to U.S. economic data.

Here, we examine when economic data is issued, which statistics are most pertinent to forex traders, and how traders might react to this information that could influence the market.

It’s harder than it sounds to trade news. The whisper figures, or the unofficial and unpublished forecasts, as well as any updates to earlier estimates, are equally as significant as the declared consensus figure.

Additionally, some releases are more significant than others; this may be determined by looking at the importance of the nation releasing the data as well as the significance of the release in relation to other releases of data.

What Releases Are Important?
Understanding which releases are truly anticipated that week is the first step in trading news. Second, it’s crucial to understand which data are crucial.

In general, data on changes in interest rates, inflation, and economic growth, including retail sales, manufacturing, and industrial production, are the most significant:

1. Interest rate decisions
2. Retail sales
3. Inflation (consumer price or producer price)
4. Unemployment
5. Industrial production
6. Business sentiment surveys
7. Consumer confidence surveys
8. Trade balance
9. Manufacturing sector surveys