In the world of foreign exchange (Forex) trading, traders rely on two types of fundamental analysis that are also used in the stock market: fundamental analysis and technical analysis.

The uses of technical analysis in Forex are very similar to its use in financial markets, where price is assumed to reflect all news, and charts are the subject of analysis. But unlike companies, countries do not have financial statements, so how can fundamental analysis be performed on a currency?

Fundamental analysis is about looking at the intrinsic value of an investment, and its application in Forex involves looking at the economic conditions that affect the valuation of a country’s currency.

Here we will take a look at some of the key fundamental factors that play a role in currency movement.

Economic indicators

Economic indicators are reports issued by a government or private organization detailing the performance of a country’s economy. These reports are a way to directly measure the health of the national economy, but we must remember that many factors and policies will affect the performance of the national economy.

These reports are published at specific times, providing the market with an indication of whether a country’s economy has improved or deteriorated.

The impact of these reports is similar to how earnings reports and security reporting impact. In the Forex market, as in the stock market, any deviation from the normal pattern can lead to large movements in prices and volumes. Some of these economic reports may be familiar, such as unemployment numbers, which are widely published. Other reports, such as housing statistics, receive less media coverage. However, each indicator is useful for a specific purpose and can be very useful for analysis.

gross domestic product:

GDP is a broad measure of a country’s economy, representing the total market value of all goods and services produced in the country during a given year.

Since GDP is often considered a lagging indicator, most traders focus on the two reports released in the months before the final GDP results: the early report and the preliminary report.

Large changes between these two reports can cause significant fluctuations.

 

retail sales

The retail sales report measures the total revenue of all retailers in a given country, and this measurement is based on a diverse sample of retailers across the country.

This report is particularly useful as an indicator of broad consumer spending patterns that have been adjusted for the impact of seasonal variables.

It can also be used to forecast the performance of lagging indicators and to assess the immediate direction of the economy. Changes in preliminary retail sales reports can cause significant fluctuations, and a retail sales report can also be compared to the sales activity of a publicly listed company.

Industry production

This report shows a change in the production of factories, mines and utilities within a country, and also reports on each factory’s “energy use” and its capacity utilization.

It is ideal to see increased production while usage is at or near maximum capacity.

Traders using this indicator are usually concerned with the production of public services, which can be very volatile, and thus energy trading and demand are greatly affected by changes in the weather. Large changes between reports can cause changes in the weather, which can cause fluctuations in a country’s currency.

Consumer Price Index (CPI)

The CPI measures the change in prices of consumer goods in more than 200 different categories.

This report, when compared to a country’s exports, can be used to see whether a country is making profits or losses on its products and services.

However, be careful of export monitoring as it is a popular focus with many traders because export prices often change in relation to the strength or weakness of the currency.

Other key indicators include the Purchasing Managers’ Index (PMI), Producer Price Index (PPI), Durable Goods Report, Employment Cost Index (ECI), and Residential Construction Starts.

And don’t forget the many special reports released privately, the most famous of which is the Michigan Consumer Confidence Survey, all of which provide a valuable resource for merchants if used correctly.

Use of economic indicators

Since economic indicators measure the state of a country’s economy, changes in reported conditions will directly affect the price and volume of a country’s currency.

It is very important to remember, that the indicators discussed above are not the only things that affect the price of a currency.

Reports from third parties, technical factors and many other things can also greatly influence the currency estimate when performing fundamental analysis in the Forex market.

Here are some tips that we offer you to do the analysis correctly:

First: Keep an economic calendar handy that records indicators and their release dates. You also have to follow the future; Often times, markets move in response to a particular indicator or report that is expected to be published at a later date.

Second: Be aware of the economic indicators that attract the most market attention at any given time. These indicators are catalysts for the largest price and volume movements. For example, when the US dollar is weak, inflation is one of the most watched indicators.

Third: Know the market’s expectations of the data, and then pay attention to whether the expectations are met. This is much more important than the data itself.

Sometimes, there is a significant discrepancy between expectations and actual results. If so, be aware of possible justifications for this difference.

Fourth: Do not react quickly to the news, because oftentimes numbers are published and then modified, and things can change quickly.

So pay attention to these adjustments, as they can be a useful tool to see trends and react more accurately to future reports.

In conclusion of our article we would like to emphasize that there are many economic indicators, and even more special reports, that can be used to evaluate Forex fundamentals.

Here it is very important that you invest your time to look not only at the numbers but also to understand what they mean and how they affect the country’s economy.

When used correctly, these indicators can be an invaluable resource for any currency trader.