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Education / Fundamental Analysis

Fundamental Analysis

Introduction to Fundamental Analysis

Fundamental analysis is based on the performance and growth of economies around the world. Major economic and financial news is released daily to the markets, outlining the monthly/weekly performances of various aspects of the country’s economy.

Fundamental analysis can be seen as one of the main reasons of market movement; a simple assumption in the Forex market can be seen as ‘if a country’s economy is doing well, therefore, the currency of the country will also do well and vice versa'. The main sectors within the economy are the service (such as the banking industry) and manufacturing sectors (such as the automobile industry). Productions of industries within both sectors are seen as key contributions to economic health or in other words a healthier economy. Simple macro-economic assumptions write that an economy’s main players are the Government, Companies (or producers), Consumers (Household income and expenditure), Banking sector and the International sector. All these, contribute towards the direction of an economy.

Main Economies

The world’s largest economy which contributes to a large proportion of global growth is the U.S. The markets look to economic and financial data released from the U.S. for speculation on the stability of the largest economy and its contribution to current global growth expectations. Other economies that are regarded as key players of economic data releases are Japan, UK, Australia, New Zealand, Switzerland and Europe. Investors can see that in Forex, these economies make up the major currencies that have high liquidity – USD, EUR, GBP, CHF, JPY, AUD and NZD. The recent rapid growth and strengthening of the Chinese economy has now labelled China as the second largest economy in the world. However, the Chinese currency (Yuan) cannot be found to be traded by retail brokers, yet this rapidly expanding economy data releases are subject to market speculation on other economies in the world, as China’s requirements to sustain such a rapid growth will allow it to depend further on other main economies of the world.

Central Banks and Interest Rates

Each country has a central reserve bank that controls the inflow and outflow of money within their economy. The control of the financial system is the basis of each Central Bank’s monetary policies that support consumers, corporations, governments and international environment’s income and spending. Each Central Bank has policy makers and a president/governor that are all influential to policy decisions. One important monetary policy tightening is each country’s interest rate; each month the interest rate decision is made by the Central Bank based on a voting system from members/policy makers. The markets provide different speculation on falling and rising interest rates. A rate rise, also known as hike, can be seen as a positive or hawkish move for the economy by the government, as interest rate rises can be a move further to economic growth; and vice versa for interest rate cuts can cause a negative or dovish move in the eyes of the market.
The markets are always influenced whenever a president of a Central Bank makes a statement or speech on current affairs in the economy. The market can be at its most volatile during such hawkish or dovish speeches/statements.

Here is a list of the major Central Reserve Banks and their governors

Economic Indicators

In order to understand whether an economy is performing well, the financial markets look to key indicators and announcements that come out every day. They can be found on AGM Markets Economic Calendar. As there are hundreds of economic news data releases daily, it is never easy to identify which are the major economic news and which has a good probability of influencing the volatility within the financial markets and traders speculation. Therefore, here are some of key economic indicators that traders should look out for when trading Forex and CFDs:

CPI - Consumer Price Index

The Consumer price Index looks at the monthly measurement of inflation in a country. It is sometimes referred to as “headline inflation”. Economies face pressures of price increases in goods and services such as transportation, food and medical care. The goods are weighted according to their importance. The country’s government and Central Bank look to these figures for effectiveness of their policies.

Consumer Confidence

It is an economic indicator based on the how consumers feel the overall state of the country. For each economy, a survey is conveyed of a certain number of households within each country and asked questions based on their income and their views on current market condition. As consumer spending, increases in wages and more jobs in the economy can help determine interest rate decisions by the Central Banks.

Employment

Unemployment and employment figures play an important role because they are used as indicators on the health of the economy or business cycle. It is important to know the percentage of the population that is with or without work as it contributes to the amount of money that is flowing through the economy via consumer and corporate spending powers.

Non-Farm Payrolls

Investors look ahead to this economical and statistical news in order to examine the number of people who were employed in all industries except Agriculture. The Forex market can be at its most volatile during this news announcement, as job creation can be a key producer of economic health, as well as further indication that the US economy is going in the right direction with their current monetary policies.

Retail Sales

Influenced by consumer spending, retail sales looks at inflation adjusted sales of retail outlets, and sometimes excludes automobile sales in its monthly figures. In simple words, it is the total retail sales for a given period of time. It may be a forecast for a future period or measure of a past sales period.

BOT – Balance of Trade

Balance of Trade is the difference between a country’s imports and exports. Higher exports than imports can indicate that an economy is benefited from an inflow of money, and also from possible natural commodities that the country may produce for exports to the rest of the world; such surpluses can help the economy in terms of higher production levels, more jobs and expenditure in the financial system of the economy.

PMI - Purchasing Managers Index

Surveys are conveyed in each country across an influential number of purchasing managers within their specified industry in order to identify current business conditions in the economy. The PMI Index is based on five indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. All these contribute to the health of overall economic growth in the economy

Manufacturing and Service sector production

The manufacturing and services sectors make up most of the production levels of an economy. The indicators can influence speculators on the health of the economy as businesses can react rapidly by changing market conditions; these industry’s insights can build a picture of the state of the economy.

Ways to read these indicators

Example 1: Let's assume that Unemployment Rate in the USA is now at 9%.

If the unemployment rate goes up to 10%, it indicates that an additional 1% of the population of the USA is without work. This means that less money will be spent in the economy, having as a result a weaker US Dollar. After this, people will want to sell it and vice versa.

Example 2: Let's assume that CPI (Consumer price index) in the Eurozone is now at 3%.

If the CPI goes up, it means that the prices in the Eurozone are going up as well. Since prices are going up, then with the same 100 Euro you had yesterday to buy 10 goods, today you can buy only 8 goods. So, your buying power as a consumer is being reduced. In result, the Euro will go down and people will want to Sell it and vice versa.

Conclusion: There are many economic indicators private reports that can be used to evaluate the fundamentals of Forex Market. It is important to take the time to not only look at the numbers, but also understand which indicator is important, its meaning and what it represents.

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