It’s difficult to understand the Forex market at large unless you have a good understanding of the factors affecting it on a day to day basis. Performing a forex market analysis is vital to your trading success.
In addition to knowing the technicals for the pairs you trade you must also know what drives the forex market from a fundamental perspective. At its most basic level, fundamental analysis tries to understand how the economy impacts currency valuation.
A multitude of factors affect the economy and by default its currency. Some of these factors include monetary policies as set by government agencies, national rates of production and employment, as well as trade and capital flows.
Fundamental considerations may be divided in two categories:
The first category consists of political, geopolitical events and Central Bank decisions. Political stability of a country generally has a positive impact on the currency while instability creates negative effects.
Sudden geopolitical events in a country or region of the world create uncertainty in traders and tend to negatively affect respective currencies.
Events in this category are difficult to predict or anticipate, yet they can have tremendous effects on markets. Therefore it’s important to stay informed on what goes on in the world and certainly what goes on in the country you trade.
The second category of fundamental considerations consists of economic data and news released by governments. Most of the releases are scheduled and occur on a regular basis.
Therefore market reaction to news and economic data can be anticipated to some degree. At the very least you know when you may want to stay out of the market!
Let’s define what we mean by economic data. Economic data refers to economic indicators that measure the performance of an economy.
The single most basic influence on the forex market is that of economics within a given country. How the economy of a country performs naturally affects how well its currency will trade.
In general, when an economy is expanding and growing the currency will be more desirable and fair better in the market. When an economy declines and contracts it tends to have a negative effect on currency value.
Virtually all countries measure the performance of their economy even though different names are used to describe economic indicators. Financial markets in general tend to respond and move based on how areas of the economy perform, as measured by economic indicators.
Most economic data is released on a monthly, quarterly or even yearly basis. Economic indicators are not created equal and vary in significance and impact. You’ll find two of the most important US economic indicators, the “key indicators”, listed below.
These indicators have the potential to “move the market” and many forex traders will stand on the side lines when these numbers are released.
FOMC Meeting Announcements:
The Federal Open Market Committee makes monetary policy decisions, including interest rate announcements. In general, higher interest rates tend to strengthen a currency while lower rates weaken it. Interest rate announcements take place at least 8 times per year.
Non Farm Payroll Report, or NFP:
it’s released on a monthly basis and tends to cause drastic moves in the market. The NFP numbers represent employment levels in the civilian labor force. Rising employment is good for a nation and the currency, while rising unemployment is not.
Other potential market moving economic indicators:
include Consumer Price Index, Durable Goods Orders, Gross Domestic Product, Housing Numbers, International Trade Balance, ISM Manufacturing Index, Producer Price Index and Retail Sales amongst others.
You can get a complete overview of what goes on in the US economy by reading the “Beige Book”, published 8 times a year by the Federal Reserve Bank. This publication includes input from industry leaders in all 12 districts of the Federal Reserve and contains a wealth of information regarding employment, inflation and a number of other economic indicators.
But most importantly it can yield valuable insight in how the feds may respond. You can find a copy of the “Beige Book” on the web.
While most forex traders focus on the technicals when conducting their forex market analysis, it is vital you also have a basic understanding of the fundamentals affecting the currencies you trade.