In Forex trading, fundamental analysis can be defined as the study of economic indicators in an effort to predict future Forex market movements/conditions. Forex traders who use fundamental analysis trade based on economic news events such as central bank announcements on monetary policy, fiscal policy, interest rates etc. among other news events that give accurate information on the performance of the economy i.e. employment reports, inflation reports etc.
Economic calendars list all upcoming economic data releases as well as expected results. This gives Forex traders an idea of what to expect however, traders are in the best position to place trades once the data is released. It’s important to note that everyone gets access to major economic news/information i.e. interest rate and central bank policy changes at the same time via economic calendars which are readily accessible online for free. This gives all traders fair advantage given the fact that economic news events usually have a predictable effect on currencies.
Major economic indicators and how they affect currencies
To understand more about fundamental analysis in Forex trading, you need to know and understand the major economic indicators and their effect on currencies. These economic indicators include (but aren’t limited to):
Gross Domestic Product (GDP) is one of the most important economic indicators in fundamental analysis. The GDP of a country indicates how a country is performing economically. A strong GDP indicates a healthy economy. This in turn suggests that the currency (of the country in question) may increase in value in comparison to currencies of countries which have weaker economies. The opposite applies. On receiving GDP news, a Forex trader is able to make better predictions on the future value of a given currency.
2. Consumer price index
Also known as CPI, consumer price index is an inflation indicator. An increasing CPI value for consecutive months is an indicator of inflation. When an economy is faced by high inflation, the Central Bank is usually forced to raise interest rates in an effort to curb spending. Increased interest rates usually increase demand for the currency in question. The opposite applies for a decreasing CPI value.
3. Employment report
If employment in a country trends downwards, the economy tends to weaken because fewer people are in a position to buy non-essential goods/services. This has an overall negative effect on the economy of the country in question. A good employment report will have a positive impact on the currency of that country and vice versa.
4. Interest rate
Forex traders and investors in general tend to invest in currencies that offer the best return and interest rates are among the most accurate indicators of a currency’s future value. Higher interest rates offer better returns on a currency and vice versa.
The above information summarizes what fundamental analysis is in Forex trading. In simple terms, fundamental analysis is the study of economic news in an effort to predict future currency movements. Major economic indicators allow accurate predictions on the future value of different currencies. After going through the above information, you shouldn’t have a problem understanding the basics of fundamental analysis in Forex trading.