FUNDAMENTAL TRADING ANALYSIS

Fundamental analysis involves the use of news and events to predict price movements.  It focuses on the effects of economic, political, social and environmental factors on the determination of foreign exchange rates.

Some of the fundamental economic indicators are:

·         Consumer Confidence Index
·         Consumer Price Index
·         Durable Goods Orders
·         Employment
·         Gross Domestic Product
·         ISM Manufacturing Index
·         Non Farm Payroll
·         Producer Price Index
·         Interest Rate

Important Fundamental Factors

A number of key fundamental factors influence the Forex Market and can affect both a trading system as well as the success of a trader.  These factors include things like interest rates, Central Bank monetary policy, politics, inflation, measures against inflation, government fiscal policies, geopolitical events like war and terrorism, natural occurrences like earthquake, floods and the likes.

Interest Rates

Short term interest rates make up a key element in the valuation of currency against another.  If rates are increased in a country, this will make that currency’s currency more attractive against other currencies which pay lower interest rates.  Currency traders holding the currency with the higher interest rate collect interest on the long currency while paying out interest on the short currency thereby collecting the difference between the two.

Inflation

If a country is in an inflationary economic cycle as indicated by the Consumer and Producer Price Index – CPI and PPI, this would make it more likely that the Central Bank of that country would tighten interest rates in order to stem the increase in inflation.  An increase in rate would tend to make the country’s currency appreciate.

Economic Expansion

The Gross Domestic Product (GDP) is an indicator that shows the total goods and services produced in a country's economy and gives a picture of the overall well being of that country.  A higher GDP signifies a healthy economy hence will cause the currency to appreciate.

Monetary Policy

Monetary policy affects interest rates hence is an important element in the valuation of a country’s currency.  A tight monetary policy causes interest rates to rise with a consequent increasing effect on the currency rate.

Fiscal Policy

The currency of a country that indulges in fiscal irresponsibility would be less favored than the one with fiscal responsibility.

Political Situation

Political stability translates into currency stability.  The currency of a country with questionable political situation is likely to fluctuate easily hence would be less favored.

Financial Markets

The expected performance of the financial markets denominated in a particular currency will affect the valuation of the currency based on the returns produced by investments in the stock and bond markets in that country.

Geopolitical Factors and Wars

The forex markets tend to favor currencies of peaceful nations with a stable political climate to the currencies of nations that are at war or are experiencing civil unrest.