Understanding Fundamental Analysis
Fundamental analysis is the evaluation of general and world economic news, and their impact on financial markets. It includes various news events such as social force, federal policy alteration, economic release, company news and earnings, and a nation’s interest rate policy and interest rates.
The main concept behind the fundamental analysis is that a nation’s currency strengthens when its current and future economic standing is robust. A robust economy plays a major role in attracting external businesses and investments.
Basically, foreign investors need to buy a nation’s currency in order to launch their businesses there. This means that a nation with a thriving and robust economy experiences increased interest in their currency. This plays a major role in reducing supply and increasing the currency’s value.
For instance, if the economy in one of the developed countries is thriving, the value of its currency increases in relation to other currencies. A nation’s currency is bound to become highly valuable with the development and stability of its economy.
This is because the nation increases interest rates to regulate inflation and development. External investors are attracted by increased interest rates which mean they require purchasing a specific country’s currency in order to invest there. This will definitely increase the price and demand of the currency while reducing its supply.
· Dominant Economic Incidents in Forex
There are various economic incidences that determine forex price fluctuation. They include,
· GDP (Gross Domestic Product)
The Gross Domestic Product report is among the most critical economic indicators. It is the highest capacity of the comprehensive economy state. The Gross Domestic Product number is usually published at 0830 hrs EST on the final day of every quarter. It indicates the activities of the previous quarter.
The GDP is the accumulated budgetary value of all services and goods generated by the comprehensive economy during the measured quarter. This, however, does not include global activity. The development rate of the Gross Domestic Product is the critical statistic to monitor.
· PPI (Producer Price Index)
The producer price index is also a critical determinant of inflation. The report is published at 0830 hrs EST within the second week of every month. It demonstrates data from the preceding month. The PPI calculates the wholesale price of goods. Its main focus is on establishing the amount producers are getting from their goods, unlike CPI which calculates the amount consumers pay for goods.
· CPI (Consumer Price Index)
The Consumer Price Index remains the most utilized inflation criterion globally. Just like the GDP report, it is published at 0830 hrs on the 15th day of every month. It demonstrates data from the previous month. Consumer price index calculates the cost alteration of various consumer services and goods for different months.
· Employment Indicators
The most critical employment indicator is published on the inaugural Friday of each month at 0830 hrs EST. the publication comprises of the unemployment rate which means the number of unemployed workforce in terms of percentage, the standard hours worked each week, the number of jobs created in terms of numbers, and the standard earnings per hour.
This report has an impact on market fluctuation. Traders often discuss NFP or Non-Farm employment report which among the monthly reports that have the highest capability to influence the markets.
· Trade Balance
The trade balance is the standard of the disparity between exports and imports of touchable services and goods. The degree of a nation’s trade innovation and stability in imports vs. exports is a critical depiction of a nation’s comprehensive economic intensity which is widely pursued.
Having fewer imports and more exports is better because the latter helps develop a nation’s economy and demonstrates the comprehensive well-being of its manufacturing sector.
· Durable Goods Orders
The durable goods orders report demonstrates the number of money people is allocating to long-lasting purchases. This report is usually published at 0830hrs EST on the 26th day of every month. It provides awareness into the prospect of the manufacturing industry.
Traders can still utilize technical analysis to deal with the price movement. This means that it is the most dependable, clear, and useful method of analyzing and dealing the markets. This is not to mean that there is hardly a fundamental analysis room for the forex broker in their toolbox. It means that it should be utilized and envisioned with caution as a tribute to technical analysis.