Forex market fundamental analysis

Fundamental Analysis is a broad term that describes the act of trading based purely on global aspects that influence supply and demand of currencies, commodities, and equities. Many traders will use both fundamental and technical methods to determine when and where to place trades, but they also tend to favor one over the other.

However, if you would like to use only fundamental analysis, there are a variety of sources to base your opinion. Central banks are likely one of the most volatile sources for fundamental trading. The list of actions they can take is vast; they can raise interest rates, lower them even into negative territory , keep them the same, suggest their stance will change soon, introduce non-traditional policies, intervene for themselves or others, or even revalue their currency.

Fundamental analysis of central banks is often a process of poring through statements and speeches by central bankers along with attempting to think like them to predict their next move. Trading economic releases can be a very tenuous and unpredictable challenge. Many of the greatest minds at the major investment banks around the world have a difficult time predicting exactly what an economic release will ultimately end up being. They have models that take many different aspects into account, but can still be embarrassingly wrong in their predictions; hence the reason that markets move so violently after important economic releases.

If the consensus fails to predict the final result, the market then usually moves in the direction of the actual result — meaning that if it was better than consensus, a positive reaction unfolds and vice versa for a less-than-consensus result. The trick to trading the fundamental aspect of economic releases is to determine when you want to make your commitment.

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Conversely, when the market is unsure - or the data results vary from what was anticipated - severe market volatility may occur. That is why beginner Forex traders are generally advised to stay away from trading around the news when practising fundamental analysis. If you're a new to trading and looking for a place to learn the ins and outs of Forex trading, our Forex Online Trading Course is the perfect place for you! Learn how to trade in just 9 lessons, guided by a professional trading expert.

Click the banner below to register for FREE! Changes in economic data may hint towards shifts in the economic situation of a respective country, which may in turn influence the value of an economy's currency. Interest rates are a major fundamental Forex analysis indicator. There are many kinds of interest rates, but here we will focus on the nominal or base interest rates set by an economy's central bank. Central banks create money, that money is then borrowed by private banks. The percentage or the principle that private banks pay central banks for borrowing currencies is called a base or a nominal interest rate.

Whenever you hear the phrase 'interest rates', people are usually referring to that concept. Manipulating interest rates, a big part of the national monetary or fiscal policy, is one of the primary functions of central banks. This is because interest rates are a great leveller of the economy.

Interest rates are perhaps stronger than any other factor and they influence currency values. They can have an impact on inflation, investment, trade, production and unemployment. The central banks generally wish to boost the economy and reach a government-set inflation level, so they decrease interest rates accordingly. This stimulates borrowing by both private banks and individuals, as well as stimulating consumption, production and the economy in general.

Low interest rates can be a good tactic, but a poor strategy. In the long-term, low interest rates can over-inflate the economy with cash, and can create economic bubbles, which as we know, sooner or later will set a toppling chain reaction across the economy, if not entire economies. To avoid this, central banks can also increase interest rates, thus decreasing the amount of borrowing and leaving less money for banks, businesses and individuals to play around with.

From a Forex fundamental analysis standpoint, the best place to start looking for trading opportunities is in the changing interest rates. News releases on the level of inflation report on the fluctuations in the cost of goods over a period of time. Over a long period of time, as the economy grows, so should the amount of money in circulation, which is the definition of inflation. The trick is for governments and central banks to balance themselves at that self-set level. Too much inflation tips the balance of supply and demand in favour of supply, and the currency depreciates because there is simply more of it than demanded.

The converse side of the inflation coin is deflation. During deflation, the value of money increases, whilst goods and services become cheaper. In the short run it may be a positive thing, but for the economy in the long run, it can be a negative thing. Money is fuel for the economy. Less fuel equals less movement.

At some point deflation may have a drastic impact on a country, to the extent that there will hardly be enough money to keep the economy going, let alone to drive the economy forward. Gross Domestic Product GDP is the measurement of all goods and services produced within an economy within a given period and is believed to be the best indicator of the overall health of an economy.

GDP on its own is not a particularly useful indicator, however, the rate of change in GDP over a period of time can tell you a lot about the health of an economy, such as whether the economy is growing or shrinking.

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The most useful tools for fundamental analysis consist of the economic calendar, the financial news media, and historic fundamental data. Trading news broadcasts from the financial news media keeps the market informed of any major economic or geopolitical developments that could directly or indirectly affect the market. Historical fundamental data can be useful to determine trends in fundamental indicators, as well as to analyze how a currency might react to a specific economic release after examining its behavior in the wake of a previous release or central bank rate decision, for example.

Some of them may also give traders an idea of what a future release could look like, such as preliminary GDP or survey numbers. Furthermore, some economic indicators often lead other indicators in signaling when an economy is turning up or down.

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The leading fundamental economic indicators include purchasing manager surveys, Producer Price Index or PPI data, and durable goods orders numbers. Each major economy has a central bank that typically manages its currency, benchmark interest rates and money supply.

Central bank activities and speeches by central bank officials are closely watched by fundamental traders for clues about future monetary policy shifts.

Some fundamental traders use economic news and data releases to initiate and liquidate short term trades based on the results of the release. While it may sound simple to trade fundamental news, often the market will not react as expected, or in many cases it will move in a completely opposite direction to what traders would intuitively expect.

Furthermore, volatility strategies involving the purchase and sale of options can be useful for opening a market neutral position that will appreciate with a significant move in either direction. Another way to take advantage of extreme news related volatility when trading with fundamentals is to establish both a long and short position in the same currency pair and then trade out of each side — preferably for a profit — once the news or the economic report is released.

Most professional traders try to avoid having a large position immediately prior to a significant economic release, simply because the volatility immediately after a major release could trigger stop positions on either side of the market. Despite the volatility, having a position coming into a number can allow a trader to take advantage of the volatility.