Fundamental Analysis

Fundamental analysis in forex trading is usually centered on financial and economic data but can also be influenced political activity. With these types of indicators, a trader can get a good idea of how strong an offer and demand of a currency can be. This type of analysis includes examination of the revision of macroeconomic indicators, the stock markets and political decisions that influence confidence in governments.

When it comes to a trader determining fundamentals, they must consider rates of growth, the GDP, types of interest, the existing inflation rate in a country, the monetary mass, the foreign currency reserves and productivity. Sometimes governments try to exert an influence on the markets with the purpose of preventing their currencies from getting too far away from a certain level. This helps avoid imbalance.

Analyzing the ForexInterventions like this usually have a significant impact on the market, but usually are short lived. To avoid any imbalances, a central bank could enter the currency market as an investor, buying or selling its currency against another. There are even times when several central banks will intervene in the market together.

Macroeconomic factors really come into play when traders are looking at expectations of a currency, as well as the news about a particular currency and potential events that could occur in a certain country that might have an influence on that currency. It is actually pretty amazing how much goes into trying to figure out what a currency may or may not do.

Governments will also publish the frequency and evolution of macroeconomic variables so that traders get to see previous results, the forecast, government’s release and any revisions made since the last month. Then when a trader sees that the variable figures don’t agree with the forecast, abrupt movements in the market usually occur, helping the trader.

Macroeconomic Variables

Below we have mentioned several of the macroeconomic variables that are commonly released and are vital for primary analysis.

Economy Growth: This is usually looked at in the quarterly GDP figure that gets published. The economy growth is important because it will tell traders how the economy of a country is evolving. If the GDP is growing, traders are aware that capital is moving, which means higher consumption and savings. If GDP is shrinking then it means the opposite.

Trade Balance: Equilibrium of a currency quote is able to occur when a country has a stable balance of payments. If a country has a trade deficit, it experiences reduction in currency reserves, which will lessen the currency value.

Unemployment: The unemployment indicator is one that can be tough to predict but can also have immediate impact on the income and consumption of families. This makes it a very important factor to know. If these figures are higher than estimated, currency of that country will drop dramatically. On the other hand, if those figures are lower than expected, value can greatly increase.

Price Developments: The changing value of a currency against another is usually neutralized by a change in differential of the interest rates. Currencies with more interest are often looked at as more attractive because of the possible containment of inflation. Traders can find this variable published monthly.

Stock Market: The evolution of currencies continues to add a greater correlation with other markets, especially the stock market. When investors consider a country to be a good place to invest, that market of stocks will be boosted by the arrival of other currencies. This makes the value of the country’s currency stay at a healthy level.

The main point of fundamental analysis is to be on look out for many of these macroeconomic variables and if they are positive in nature, you will be able to recognize an increase in the quote of the currency. But also be on lookout for negative variables because this will show a decrease in currency.