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Everything about Forex Fundamental Market Analysis
Here is an Article to let you understand “What is Fundamental Analysis”.
- What is Fundamental Analysis?
- How does Fundamental Analysis work?
- Fundamentals of “Capital Flows” and “Trade Flows”
- Every Important Event for Fundamental Analysis
- Key US economic indicators
- Other important economic indicators
- Events that can affect currency and economy
- How to prepare before the announcement of important economic indicators?
What is Fundamental Analysis?
Fundamental analysis is concerned about predicting the future price movements of a financial instrument.
It takes into account the economic, political, environmental situations of the country the currency represents and other vital factors and figures that affect the supply and demand.
Specifically, interest rate adjustments, international trade and the gross domestic product or GDP are what Forex traders consider in making their price forecasts.
While technical analysis puts emphasis on the effect of market movement and predicting trends in the short term usually less than three months, fundamental analysis focuses on the causes of such movement in the long term.
And while one method maybe enough, many traders who have been successful in currency trading use a combination of these two techniques.
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How does Fundamental Analysis work?
A fundamental analyst, therefore, needs to make a more detailed study of a market compared to a technical analyst.
As fundamental analysis is all about the future market, it considers a number of factors in determining price trends – seasonal cycles, weather, supply and demand and government policy.
It assesses, in particular, the direction of currency trading based on any criteria except the price of the currency.
As an example, a Forex fundamental analyst for a certain currency studies the supply and demand for a country’s currency, products or services.
He or she also considers that country’s management and government policies, historic and predicted performance, future plans and all other economic indicators.
After gathering the data, the analyst then comes up with a model to identify the present and predicted value of a currency against other currencies.
What normally happens is that an increase in supply without corresponding increase in demand leads to a lower currency value while a rise in demand without matching rise in supply leads to a higher currency value.
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Fundamentals of “Capital Flows” and “Trade Flows”
The capital flows of a country refer to the net quantity of currency which is traded via capital investments.
These investments include fixed income market and equity market investments which form part of the flow of portfolio investments and international government bonds as well as third party licensing agreements, joint ventures and foreign direct investment which are the physical flows of capital indicating stability and growth.
The trade flows, on the other hand, are also known as current accounts that have the most influence in price movements.
They measure the net of imports and exports of a certain country and their impact on the currency’s value.
It is in this line that international trade serves an important function as importers need to sell currency used to purchase goods and services that are being exported.
It is also for this reason that countries with positive trade flows or those with exports greater than their imports have surpluses that ultimately contribute to their increased currency.
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Every Important Event for Fundamental Analysis
The value of each currency traded in FX is affected by the economic and political conditions of each issuing country, and the value of the currency may change significantly due to significant events, announcement of economic indicators, etc.
The “fundamental analysis” based on the economic and political conditions of each country is useful for understanding and forecasting rate fluctuations that cannot be explained only by the “technical analysis” that analyzes the exchange rate movement itself.
Investors should at least keep track of the country in which the currency pair is trading and the indicators of the US economy that issue the key currency, the US dollar.
Below, we will explain important economic indicators, examples of actual market movements, and information collection methods in the FX market.
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Key US economic indicators
The world’s hot spot in the FX market is the US economic indicator, which issues the base currency, the US dollar.
Each data and statistic is announced regularly, and if the key metric is far from the expected value, the market becomes a kind of fuss.
Be aware of the schedule for the announcement of important economic indicators so that you can be prepared for sudden rate fluctuations.
| Name of News, Event | Date |
|---|---|
| ISM Manufacturing Business Index | 1st business day of every month |
| ISM Non-Manufacturing Business Index | 3rd business day of every month |
| US Employment Statistics | The first Friday of every month |
| US trade balance | Beginning of every month |
| Retail sales | Every second week |
| CPI (US Consumer Price Index) | Around the 15th of every month |
| PPI (US Producer Price Index) | Around the 15th of every month |
| Number of new homes sold | End of the month |
| Personal consumption expenditure (PCE) | End of the month |
| US GDP | End of the month |
| US policy rate | 8 times a year |
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1. US Employment Statistics
The US Employment Statistics is a compilation of a number of indicators on the employment status of the United States, and is an important economic indicator that shows economic trends and also affects US monetary and fiscal policies.
Generally announced on the first Friday of every month by the US Department of Labor.
Among the employment statistics, changes in the number of employees in the non-agricultural sector (month-on-month) and unemployment rate are the indicators that investors particularly pay attention to.
The ADP employment statistics, which is released two days before the US employment statistics, is also noteworthy as a leading indicator.
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2. ISM Business Confidence Index (Manufacturing/Non-manufacturing)
The ISM Business Confidence Index is compiled by the National Supply Management Association (ISM) by conducting a questionnaire survey on business sentiment compared with the previous month from purchasing officers of 350 manufacturing and non-manufacturing companies.
When the index exceeds 50, it indicates economic expansion, and when it falls below it, it indicates recession.
The ISM business confidence index is released earlier every month than the employment statistics, so it will be noted as a leading indicator.
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3. US Retail sales
Retail sales are those announced by the US Department of Commerce, excluding the entire retail business and automobiles.
In the United States, where personal consumption accounts for about 70% of GDP, retail sales are an important indicator of economic trends.
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4. Personal consumption expenditure (PCE)
Personal consumption expenditure (PCE) is a survey of personal income and consumption in the United States.
Like retail sales, it will be announced by the Department of Commerce and will be a leading indicator of GDP.
Furthermore, the PCE deflator, which divides the nominal PCE by the real PCE (the PCE calculated by taking into account price fluctuations), and the core PCE deflator, which excludes the food and energy prices that are subject to sharp price fluctuations, are the Fed that determines the policy rate and is also an indicator of high interest from the FX market.
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5. CPI (US Consumer Price Index)
The CPI (US Consumer Price Index) is a survey of price fluctuations in goods and services and is published by the US Department of Labor around the 15th of every month.
Like the PCE deflator, it is an index that represents price fluctuations, but it can be said that the PCE deflator, which has a wider survey range, is attracting more attention from the Fed.
Since CPI is earlier in the monthly announcement, it is attracting attention as a leading indicator from the FX market.
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6. US New Home Sales
The number of new homes sold is a summary of the number and price of new homes sold across the United States and by region, announced by the US Department of Commerce at the end of each month.
It is one of the indicators that is said to have a high degree of precedence over the US economic trends, and since it has a large ripple effect inviting demand for building materials, home appliances and household goods, and it is also attracting attention from the FX market.
Similarly, compared to the “Number of used homes sold” announced by the National Real Estate Association (NAR) at the end of every month, the leading edge (the speed reflected in the economy) is expected to be the new homes sold 1-2 months earlier than the number of used homes sold.
This is because the number of used homes sold is calculated by transferring ownership, while the number of new homes sold is calculated when sales are completed.
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7. US GDP
US GDP is an economic indicator of production activity throughout the United States, and preliminary figures, revised values, and final values are announced quarterly.
Especially noteworthy are the preliminary figures announced in January, April, July and October.
Since US GDP accounts for a large portion of the world GDP, it is attracting attention not only from FX but also from stock markets and financial markets around the world as an indicator that influences the global economy.
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8. US policy rate
The US policy rate is an important economic indicator released after the end of the FOMC (Federal Open Market Commission), a monetary policy meeting in the United States, which is held eight times a year for two days each time.
It can be said that the interest rate of investors is very high because the Fed and the rate cut can determine how the Fed is looking at the current US economy and are directly related to interest rates when holding assets in the US dollar.
Also, after the announcement of the policy interest rate, the regular press conference by the Fed Chair will be highly noted.
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9. US Trade Balance
Although the US trade balance has a constant deficit, if the US trade deficit shrinks, it can be a “material for buying dollars” because the US is in good economic condition.
On the contrary, if the US trade deficit increases, it may become a “material for selling dollars”.
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10. PPI (US Producer Price Index)
PPI (American Producer Price Index) is an index released by the Ministry of Labor around the 15th of every month, along with CPI (Consumer Price Index).
Indicates whether the selling price (wholesale price at the time of shipment) by a US manufacturer is rising or falling.
It is said that PPI reflects the economy faster than CPI, and is a leading indicator.
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Other important economic indicators
In addition to the US economic indicators, indicators related to the world’s most traded euro, Japanese yen, and British pound are also important.
Let’s see other important economic indicators released by countries other than the US.
1. Euro related economic indicators
The euro is the most traded currency after the US dollar.
There are indicators for the entire euro area and for each member state, and it is easy to draw attention to the indicators of Germany, which is a large economy.
| Name of Events | Date |
|---|---|
| EU Quarterly Gross Domestic Product (GDP) Preliminary | Announced in January, April, July, October |
| EU Consumer Price Index (HICP) | Announced monthly (preliminary/revised twice a month) |
| ZEW Business Confidence Index | Announced around the middle of every month |
| IFO Business Confidence Index | Announced at the end of each month |
ZEW Business Confidence Index is a quantified summary of the German business sentiment questionnaire survey announced by the German private research company ZEW around the middle of every month.
About 350 financial analysts have been surveyed and it can be interpreted as an index of 50 or higher equals as a boom.
IFO Business Confidence Index is a summary of business affairs questionnaire surveys of about 7,000 German companies announced by the German public research institute IFO at the end of each month.
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2. British pound related economic indicators
The British pound is the most traded currency after the US dollar, the euro and the Japanese yen.
It has a nickname such as “murder currency” due to its sharp price movement, but it is preferred by some short-term traders.
| Name of Events | Date |
|---|---|
| BOE policy interest rate | Announced at the beginning of every month |
| BOE inflation report | Announced in February, May, August and November |
| British GDP | Announced in February, May, August and November |
| UK Unemployment Rate/Number of Unemployment Insurance Applications | Once a month |
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3. JPY related economic indicators
The Japanese yen tends to appreciate when the global situation becomes unstable (buying yen in an emergency).
| Name of Events | Date |
|---|---|
| Preliminary quarterly gross domestic product (GDP) | Announced in February, August, November |
| National Consumer Price Index (CPI) | Once a month |
| Unemployment rate | Announced once a month |
| Monetary base | Announced at the beginning of each month |
Japanese monetary base is an index that indicates the amount of currency supplied to the market, announced at the beginning of each month.
As the supply increases, the yen will weaken, and on the contrary, the yen will increase.
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Events that can affect currency and economy
In addition to important economic indicators, keep an eye on events and political events that are closely linked to the economy.
It is also necessary to pay attention to the strong yen for risk-off (risk avoidance) that occurs when global financial instability and political risks increase.
1. US presidential election
The presidential election, held every four years in November, begins to affect the exchange market around June of the previous year, when the debate begins.
The value of the US dollar will rise and fall in response to the policies set in each of the states in July to August, which will have a full-scale influence from the elections in February when the primary election begins and the candidates from the two major parties will be decided.
2. G7/G20 Summit
The Economic Summit held by the major developed countries is an event where the power balance between countries and government policies of each country can be read.
Investors are reluctant to hear from the leaders of each country, and this is reflected in the exchange rate.
3. US-China trade war
Trade frictions between the United States, the world’s largest economy and China, the second largest economy, have increased, and the exchange rate has been volatile due to this.
4. Key remarks by important figures
Statements by the US President, the Federal Reserve Chairman, the BOJ Governor, and others also influence the exchange rate.
5. Geopolitical risk
Geopolitical risks include conflicts and civil wars that have a significant impact on the political and economic conditions of each country, such as military tensions between the United States and Iran, missile launches by North Korea, and conflicts between Syria and Ukraine.
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How to prepare before the announcement of important economic indicators?
Before and after the announcement of the important economic indicators, the market is in a state of “festival” due to various speculations of FX market participants.
There are people who trade on the trend of rate fluctuations, but it is also a high risk.
To avoid risk, settle all your pre-owned positions and avoid getting caught up in market volatility.
You can check the schedule and summary of important economic indicators on the economic indicator calendars and breaking news of FX companies.
You can also collect economic and exchange news in Forex news from Reuters, Bloomberg, and in foreign exchange reports from banks.
Check out the SNS of important people and the political news of each country.
