Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.
If you think about it, this makes a whole lot of sense! Just like in your Economics 101 class, it is supply and demand that determines price, or in our case, the currency exchange rate.
Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.
You have to understand the reasons of why and how certain events like an increase in the unemployment rate affects a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen.
The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.
For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving.
As the economy gets better, raising interest rates may be needed to control growth and inflation.
Higher interest rates make dollar-denominated financial assets more attractive.
In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will likely increase.
Later on in the course, you will learn which economic data points tends to drive currency prices, and why they do so.
You will know who the Fed Chairman is and how retail sales data reflects the economy. You’ll be spitting out global interest rates like baseball statistics.
But for now, just know that fundamental analysis is a way of analyzing the potential moves of a currency through the strength or weakness of that country’s economic outlook.
Economic Indicators
Economic indicators are reports released by the government or a private organization that detail a country's economic performance. Economic reports are the means by which a country's economic health is directly measured, but remember that a great deal of factors and policies will affect a nation's economic performance.
These reports are released at scheduled times, providing the market with an indication of whether a nation's economy has improved or declined. These reports' effects are comparable to how earnings reports, SEC filings and other releases may affect securities. In forex, as in the stock market, any deviation from the norm can cause large price and volume movements.
You may recognize some of these economic reports, such as the unemployment numbers, which are well publicized. Others, like housing stats, receive less coverage. However, each indicator serves a particular purpose and can be useful. Here we outline four major reports, some of which are comparable to particular fundamental indicators used by equity investors:
The Bottom Line
There are many economic indicators, and even more private reports, that can be used to evaluate forex fundamentals. It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy. When properly used, these indicators can be an invaluable resource for any currency trader.
Top Economic Indicators
- Beige Book
- Business Outlook Survey
- Consumer Confidence Index (CCI)
- Consumer Credit Report
- Consumer Price Index (CPI)
- Durable Goods Report
- Employee Cost Index (ECI)
- Employment Situation Report
- Existing Home Sales
- Factory Orders Report
- Gross Domestic Product (GDP)
- Housing Starts
- Industrial Production
- Jobless Claims Report
- Money Supply
- Mutual Fund Flows
- Non-Manufacturing Report
- Personal Income and Outlays
- Producer Price Index (PPI)
- Productivity Report
- Purchasing Managers Index (PMI)
- Retail Sales Report
- Trade Balance Report
- Wholesale Trade Report
Read more: Economic Indicators https://www.investopedia.com/walkthrough/forex/advanced/level8/indicators.aspx#ixzz5SCAFHytF
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