Foreign exchange market trading mainly depends on the basic two kinds of analysis:
- Fundamental Analysis
- Technical Analysis
Technical and fundamental analysis has a great impact on the price movement of a currency pair. The price movement also depends on recent news and views.
Organizations have a balance sheet but in the currency market there is no balance sheet, it is reflected in the new, trade, and business.
The fundamental analysis looks at the intrinsic value of the investment. In the forex market, it looks at the economic situation that affects the valuation of a Nation’s currency.
In this article, we will look at the major fundamentals that play a role in the currency movement.
Fundamental Analysis in Forex Trading
Forex traders use different types of news to take their trading decision. Traders use different events, economic statistics, financial statements, and other reports to make buying and selling decisions and this kind of analysis we call fundamental analysis.
In a word, fundamental analysis means studying the news and events and projecting the future value of currency pairs.
Fundamental analysis in the forex market pays attention to the changing economic indicator such as interest rate, employment, and inflation rate.
Different Aspects of Fundamental Analysis
Forex market gets affected every time by the micro and macroeconomic decisions, for example:
- Geopolitical events and their linkages
- GDP growth rates
- Forward forex market
- Potentially disruptive geopolitical events
- Employment statistics
- Interest rates, and
- Balance of trade reports among others.
There can be two kinds of Approaches for analysis:
- Top-Down approach
- Bottom-up Approach
Top-Down approach
It begins with analyzing border areas of macroeconomic factors, aggregating data, refining that data, and collecting only this information that relates to that currency pair.
Bottom-up approach
This kind of analysis starts with analyzing the updates on currency pairs to aggregate macroeconomic information.
The relation between the balance of trade and interest rate
These are the key driving factors for a particular currency pair. If a certain country has a trade surplus it means there is a high demand for its product in the outside country.
On the other hand, it also means there is a greater demand for its currency Which increases the currency value.
In the same higher relative interest rate leads to the cash inflow by increasing the value of that particular currency.
How do Demand and supply affect the currency rate?
The demand and supply affect the currency valuation for example, there is a significant impact regarding the valuation of commodities.
For example, if you take Nickel, we can see that increasing conflict in geopolitics results in the increasing demand for Nickel, which is used in arms manufacturing.
Economic Indicators in Fundamental Analysis
- The most important economic record is the Published government’s annual report. The economic report is directly connected to the economic health of a country.
- The annual report was published by a private organization.
- At the same time, there are many other factors, for example, political social factors that also contribute to the exchange rate that but you will not find these things in the financial statement.
- Economic reports released in a scheduled time are interfacial indicate the health of a country’s economy whether it has improved or declined.
- Economic reports can be compared to the emerging information, security, and stock exchange market and other factors that affect the securities.
- So in the forex market, any deviation from the regulatory standard can put a significant impact on the price movement.
- The increasing number of unemployment describes that the country’s economy is not doing well, as a result, the price of that currency of that particular country can go down.
- Housing rate, a construction company can easily move the currency market.
- Issues like this also put a significant impact on the movement of the currency.
Gross Domestic Product (GDP) And Fundamental Analysis
GDP is a measurement of a country’s economy and it also represents the total market value of all goods and services available in the country given a particular year.
But in most of the cases, GDP in the figure is considered as a slow indicator, as a result, most of the weathers focus on the two reports which are the advanced report and preliminary report. Significant dispersion in this report can cause volatility for the Forex traders.
Sometimes we use GDP and profit margin in a synonymous way, both of these measure the internal growth of a country.
Retail Sales and Fundamental Analysis
A retail sales report indicates the total amount of revenue receipt from all retail stores in a particular period in a given country. This kind of report is useful in a border time frame.
But the revision of the advanced reports of retail saying can create significant volatility for the traders. the sales report can be useful to compare the output of a publicly-traded company.
Industrial Production and Fundamental Analysis
This kind of report represents the production of factories, mines, and utilities within a nation. this also represents the capacity of utilization which means the degree to which each factory can be used.
Every Nation wants to see that its production increases at the maximum rate to utilize its maximum capacity.
Consumer Price Index (CPI) and Fundamental Analysis
Consumer price index which is commonly known as CPI changes in terms of price over 200 separate categories. when we compare this report to a country’s export we can see whether a country is making or losing money in the production and services.
At the same time, we have to be very careful because it is a popular forecast for many traders. the price of the exports of changes relative to the currency’s strength and weakness. There are a few other indicators. For example:
- Purchasing management index (PMI)
- Producer price index (PPI)
- Employment cost index (ECI) etc
Conclusion
Finally, we can say Fundamental analysis tries to measure currency’s intrinsic value by examining related economic and financial factors including the financial statement of the overall economy, strategic initiatives, political factors, social factors, microeconomics indicators, and consumer behavior.
So we cannot solely depend on technical analysis, we should also give equal importance to Fundamental analysis.
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