What is the fundamental analysis in Forex
Market analysis is one of the main trading tools that helps a trader to make the right decisions. In Forex, two types of analysis are used — technical and fundamental.
Fundamental analysis in Forex is market analysis which involves studying how the big political and economic events influence the currency market. Where technical analysis analyzes trends, fundamental analysis delves deeper into qualitative aspects, such as related economic, financial factors, economic health and macroeconomic factors. It involves the interpretation of statistical reports and economic indicators. For example, changes in interest rates, employment reports, and the latest inflation indicators.
Forex traders must pay close attention to economic indicators which can have a direct, and sometimes predictable effect on the value of a currency in the forex market. As these indicators can greatly influence exchange rates, it is important to know beforehand when they are due for release. The exchange rate spreads can widen during the time leading up to the release of an important indicator, adding to the cost of your trade.
Therefore, it is recommended to regularly consult an economic calendar which lists the release date and time for each indicator. Economic calendars can be found on Central Bank websites and through most brokers.
Indicators of fundamental analysis
Fundamental indicators measure economic condition of any country and are regularly published in the media. The main economic indicators in fundamental analysis are:
- volume of import-export operations;
- consumer price index;
- producer price index;
- performance indicators of production;
- indicators of productivity and unemployment;
- movement indicators of investment and commercial capital of the country;
- performance of the construction industry, etc.
The level of these indices reflects economic stability of a certain state and allows a trader to understand if it is profitable to invest money in a particular currency. For example, when a country imports much more than it exports, it states about the national currency devaluation and becomes a negative sign for an investor. Increasing unemployment in a country causes the production decrease, which entails the national currency depreciation. A consumer price index is a precondition for increasing its rate.