P: R: F: Company Authors Contact. Long Short. Oil - US Crude. Wall Street. More View more. Forex Fundamental Analysis Find out how central banks impact the forex market, and how to use news and key economic events to make trading decisions. How to Read a Forex Economic Calendar. The Role of Central Banks This section explores the role of central banks in the financial markets. Learn about how the likes of the Federal Reserve, European Central Bank, and the Bank of England impact currency prices and trading decisions.
Foundational Trading Knowledge 1. Forex for Beginners. DailyFX Education Walkthrough. Forex Trading Basics. Why Trade Forex? Macro Fundamentals. Forex Fundamental Analysis. Find Your Trading Style. Trading Discipline. Understanding the Stock Market. Commodities Trading. Market Data Rates Live Chart. Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect currency prices.
If you think about it, this makes a whole lot of sense! Just like in your Economics class, it is supply and demand that determines price , or in our case, the currency exchange rate. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand. As the economy gets better, raising interest rates may be needed to control growth and inflation.
In order to get their hands on these lovely assets, traders and investors have to buy some U. This increases demand for the currency. As a result, the value of the U.
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|Fundamental analysis in forex||This is referred to as a tend and traders make use of key levels, levels of support and resistance, and indicators to identify trends as soon as possible and with accuracy. Interest rates are a major Forex fundamental analysis indicator. Technical traders look for price patterns such as trianglesflagsand double bottoms. It can be used to predict the performance of more important lagging indicators and to assess the immediate direction of an economy. Trading Discipline. Login Register.|
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|Simple profitable forex strategies||These reports' effects are comparable to how earnings reportsSEC filings, and other releases may affect securities. Jobs growth is a measure of how many nonfarm jobs the U. Too much inflation tips the balance of supply and demand in favour of supply, and the currency depreciates because there is simply more of it than demanded. There is a much higher chance of a successful trade if one can find turning points on the longer timeframes, then switch down to a shorter time period to fine-tune an entry. Dukascopy Bank Tokens.|
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Economic indicators are reports released by the government or a private organization that details a country's economic performance. Economic reports are the means by which a country's economic health is directly measured, but remember that many factors and policies will affect a nation's economic performance. These reports are released at scheduled times, providing the market with an indication of whether a nation's economy has improved or declined. These reports' effects are comparable to how earnings reports , SEC filings, and other releases may affect securities.
In forex, as in the stock market, any deviation from the norm can cause large price and volume movements. You may recognize some of these economic reports, such as the unemployment numbers, which are well-publicized.
Others, like housing stats, receive less coverage. However, each indicator serves a particular purpose and can be useful. GDP is considered the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year.
Since the GDP figure itself is often considered a lagging indicator , most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report.
Significant revisions between these reports can cause considerable volatility. The GDP is somewhat analogous to the gross profit margin of a publicly traded company in that they are both measures of internal growth.
The retail-sales report measures the total receipts of all retail stores in a given country. This measurement is derived from a diverse sample of retail stores throughout a nation. The report is particularly useful as a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators and to assess the immediate direction of an economy.
Revisions to advanced reports of retail sales can cause significant volatility. The retail sales report can be compared to the sales activity of a publicly-traded company. This report shows a change in the production of factories, mines, and utilities within a nation. It also reports their " capacity utilization ," the degree to which each factory's capacity is being used. It is ideal for a nation to see a production increase while being at its maximum or near-maximum capacity utilization.
Traders using this indicator are usually concerned with utility production, which can be extremely volatile since the utility industry, and in turn, the trading of and demand for energy is heavily affected by changes in weather. Significant revisions between reports can be caused by weather changes, which in turn can cause volatility in the nation's currency.
The CPI measures change in the prices of consumer goods across over different categories. This report, when compared to a nation's exports, can be used to see if a country is making or losing money on its products and services. Be careful, however, to monitor the exports — it is a popular focus with many traders because the prices of exports often change relative to a currency's strength or weakness.
And don't forget the many privately issued reports, the most famous of which is the Michigan Consumer Confidence Survey. All of these provide a valuable resource to traders if used properly. Since economic indicators gauge a country's economic state, changes in the conditions reported will therefore directly affect the price and volume of a country's currency. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency's price.
For instance, the typical monthly deficit for the US is around billion, a typical yearly deficit is now 1. Few economies today ring out a budget surplus, either monthly or yearly. Most move into consistent and deeper budget deficits. Employment represents the health of large economies where job creation is the foremost indicator of consumer spending: more workers mean more spending which helps businesses see higher revenue and fewer workers mean less spending, less revenue.
Moreover, poor employment data can tell investors to remove their capital out to more favorable country and currency and improved employment data can lure them into pouring more capital into the economy. Higher employment can be a boost to the currency and economy, as investors see it as a sign of a healthy economy. More people employed means more spending, which is favorable in large economies where consumer spending represents the majority of economic activity.
Moreover, traders will see higher unemployment from the eyes of the central banker who might be inclined to lower interest rates to encourage borrowing and spending and job growth. An interest rate decrease will, in turn, cause global investors to shy away from the currency and search for higher yields elsewhere. The Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the past week and represents the earliest U.
Continuing Jobless Claims, released at the same time as the initial figures, measures the number of unemployed individuals who qualify for benefits under unemployment insurance. Change in thousands. Measures the change in the number of people employed during the previous month, excluding the farming industry. The Unemployment Rate measures the percentage of the total work force that is unemployed and actively seeking employment during the previous month, expressed as a percentage.
Of all the events above, the US nonfarm payrolls is perhaps the biggest event, as United States is highly dependent on the growth of new jobs to fuel its consumer spending economy. Sometimes the unemployment rate of a region can be more muted due to lag time e.
Gross Domestic Product GDP measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy. Government institutions make key economic decisions based on it such as preparing for the government budget , central banks formulate policy based on it, and the stock exchanges and business sectors depend on GDP to prepare forecasts of economic performance for production, investment and employment planning.
It is the most obvious statistic to look up when judging the present status of a world economy. A rising GDP generally spells well for currency and economy. If production is high and translates into good revenue, the currency grows stronger as a result. However, a falling GDP or stagnant GDP can not only signal that the economy has grown weaker, but it can also lead the central bank to lower interest rates to spur more borrowing and economic activity to improve GDP.
If the central bank lowers interest rates out of concern for GDP, then the currency becomes less attractive for international investors to hold and the currency weakens. This report computes the size of the economy in two ways: 1 current or nominal GDP tallies the value of all goods and services produced in a country using present prices, and 2 real or chained GDP counts only the value of what was physically produced.
It is vital to know if the country grew because of the quantity of products sold or whether it was a result of price spikes or inflation. We want to see real increases in economic output, which means a greater supply of goods and services available to consumers. Higher real GDP improves the standard of living for its citizens, while GDP growth due to inflation erodes living standards.
Most economic calendars report the GDP figure which is the annualized change in the inflation-adjusted value of all goods and services produced by the economy, expressed as a percentage change. Since GDP is a lagging indicator that comes out quarterly, traders will look to more frequent manufacturer related stats to get a faster sense of the economic vitality of a country. In contrast, manufacturing activity is highly sensitive to changes in interest rates and demand, and so it corresponds more closely to shifts in the economy.
When manufacturing managers are increasing their material purchases, new factory orders are being placed, and industrial production shows increased output, you have an economy revving up for production and growth. The part that represents international sales signifies an increase in exports, which improves the trade balance and brings in more needed revenue in exchange for exports.
The right balance of international trade generally influences forex rates. Increasing exports leads to high forex reserves that will eventually strengthen the currency against other international currencies. This Report measures the activity level of purchasing managers in the manufacturing sector. A reading above 50 indicates expansion in the sector; below indicates contraction.
If the report indicates a decrease in purchases of manufacturing materials, the result may be a massive decline in production activity in the days to come; if the report indicates an increase in purchases, it can signal future growth in industrial production. Factory orders measures the change in the total value of new purchase orders placed with manufacturers for both durable and non-durable goods.
It is meant to capture the overall health of the entire manufacturing sector, measuring new orders, inventories, total shipments and unfilled orders for the month in question. It is thus a leading indicator of industrial production more so for Germany than US. Durable Goods US is a subset of Factory Orders that measures the change in the total value of new orders for long-lasting manufactured goods such as washing machines, including transportation items. It has more significance than factory orders for the US.
This report measures the change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities. Since it measures the change in the volume of goods produced, there is no need to worry about the distorting effects of inflation.
Exports follow this report because it reacts fairly quickly to the ups and downs of the business cycle. These surveys rate the current level of business conditions in the country. Changes in business sentiment can be an early signal of future economic activity such as spending, hiring and investment. Consumer spending is arguably a more reliable indicator of economic health than production because spending, not production touches virtually every household.
If Hewlett-Packard manufactures computers it has a limited economic impact on the main street. But if people start buying stuff, like cars, homes, computers, it has a substantial impact across the board. Consumer spending translates into sales, which translates into shipping, warehouse space, retail space, accounting, etc. Domestic spending tends to rise and fall in a general pattern as it is retail based, whereas production rises and falls in specific industries and depends more on international markets and the global economy.
Retail sales is another way of looking at economic activity, only from the angle of what is sold instead of produced. Retail sales are an important economic indicator because consumer spending drives large economies, particularly that of the US. Think of all of the people and companies involved in production, distribution, and selling the goods used on a daily basis.
This sector influences most of the other sectors. For instance, an increase in retail sales can trigger an increase in factory production, which may then require the purchase of more raw materials and machinery causing an increase in the PMI. Most developed economies now rely heavily on consumer liquidity to fuel the economy. Consumer expenditures drive the sales, imports, factory out, business investments and job growth of the US and many other countries. Traders like to see a healthy increase in personal income and spending as good for the currency.
High consumer demand encourages more growth and puts upward pressure on interest rates, which in turn makes the currency more attractive to foreign investors, particularly if it results in a bigger return on investment than other currencies. A weaker-than-expected report on consumer spending foreshadows lower interest rates, which is bearish for the currency. However, if the country is in a large trade deficit, such as the United States, an overly strong retail sales number can signal trouble for the currency because many of the retail goods are imported, and a jump in imports increases demand for non-dollar currencies to pay for these foreign products.
The best portent of future consumer demand can be found in real disposable personal income, which is the income left over after taxes and then adjusted for by inflation. If consumers buy more, it is a sign of economic growth and prosperity.
The shortcoming of the retail sales report is that it represents only spending on goods and tells us nothing about what is spent on services, which makes up the other two-thirds of consumer spending. Furthermore, retail sales are measured only in nominal dollars, making no adjustment for inflation, which makes it difficult to tell if consumers purchased additional goods or simply paid more for them.
The measurement of how much more, or less, did consumers buy from retailers can give us a heads up on what future GDP growth might look, as changes in real GDP correlate with changes in real retail sales. Measures the change in the total value of sales at the retail level excluding automobiles. This index examines how consumers feel about jobs, the economy and spending. If they are confident and happy, they are more likely to shop, travel, invest, but if they are doubtful and unhappy, they can tighten up on their spending and the economy may slow down as a result.
Unfortunately, history has shown that the relationship between consumer confidence and spending is not as close as one might intuitively think. The strongest evidence of confidence is found at the cash register, which means in retail sales above. However, long term the six-month moving average of consumer confidence levels has proven to be a better indicator of future household spending.
Traders like to invest in currencies that have upbeat consumers, as it means a stabilizing of interest rates, increasing demand for currency, whereas depressed consumers raises the prospects of falling interest rates, which bodes ill for the currency. Household income represents the capacity to spend, personal spending and retail sales represent a gauge on spending, and consumer confidence represents the willingness to spend.
Keep in mind that consumers in the last 10 years have based much of their spending on personal credit, or borrowed money, and we have seen the fallout of this with the bursting of the credit bubble. Household income becomes more important long term forecast of future spending because it is based on what is real; only a growing consumer income can grow an economy if consumer spending represents a large chunk of it.
Growing, inflation adjusted economic activity GDP must be fueled by a growing, inflation adjusted consumer income. If the official GDP has been going up, and the household income has been going down, then it speaks to the fact that growing economy cannot be fueled by an equally growing consumer income and thus it is doomed to retract.
For instance, in the U. In the absence of income growth, debt expansion can act as a short-term prop for an economy, but in the US and Europe, it runs its full course. Housing Starts and Sales relate to the construction of new homes and selling of new and existing homes, both of which can come surprisingly close to foreseeing the future direction of an economy. Residential real estate is among the first sectors to shut down when the economy nears a recession and blooms again when the economy starts back up.
It outstrips the rest in being acutely sensitive to interest rates. An overheated economy and housing market drives up interest rates and mortgage prices, which eventually depresses demand for homes and discourages future construction. Conversely, when the economy weakens, home prices fall along with interest rates and home buying becomes rekindled when prices and rates become more affordable. Sales of homes, in turn, can indirectly stimulate the economy because sellers use the capital gain from the sale of one house to buy another, which invariably means additional spending on furniture and appliances, as well as greater commissions to real estate agents, moving companies and mortgage bankers.
Moreover, an increase in home sales is an unmistakable sign that buyers are confident about their jobs and future income growth. A strong housing start report can be bullish for the currency because it supports a scenario of higher corporate profits and a firming of US interest rates. More home sales indicates a stronger consumer base and a stronger currency. Conversely, a currency can fall with weak housing starts because it signals slower economic growth and thus the potential of central bankers to lower interest rates.
Central bankers will lower interest rates during a sluggish housing market, causing the currency to depreciate as foreigners choose to seek out more lucrative investment opportunities outside the country. Housing starts and permits record the number of new homes being built. A drop-off in home construction signals that the broad economy is slowing down while a rebound in housing starts and home buying signals a pickup in the economy.
This report monitors the volume of home sales nationwide, and it is a good way to gauge housing demand in the country. A drop-off, or rebound, in-home sales signals a turning point in the economy. Interest rate is the biggest force to influence home sales, with every percentage point increase in mortgage rate reducing home sales by , units.
Moreover, if consumer spending is about to change direction you will see it change here first, as such a big expense attracts prospective buyers who are content with their income, job security and economic outlook. When home buying wanes, banks will cut back on construction loans, investment falls away, and with it demand for building supplies, appliances and construction workers.
Global investors will shift their assets in response to geopolitical developments. Like all markets, the currency market is affected by what is going on in the world. Natural disasters like earthquakes, volcanoes, tsunamis, hurricanes can cause horrific devastation to a country and its economy, but the effect on the home currency is hard to predict.
We know that the currency move can be dramatic, but the direction of the move is hard to gauge. For instance, when the earthquake and tsunami hit Japan on March 11, , there were thoughts the Yen will bound to weaken; after all, this disaster killed over 10, people and leveled whole towns and threatened the entire country with major radiation from the Fukushima nuclear-plant meltdown.
One later learned that the Yen surged against other major denominations in the expectation that companies will repatriate the currency to help pay for rebuilding efforts. But this repatriation idea for currency strength cannot be so easily extended to other nations. Japan like China is unique in having an incredible amount of stockpiled foreign currency particularly US dollars as a result of decades-long positive trade surpluses, and consequently, its citizens and corporations can repatriate sell its foreign investments and convert back to Yen so much more than most other industrialized countries.
The United States is in an opposite predicament: it has had decades-long trade deficits, and most of its citizens and corporations are living out of borrowed funds. Hurricane Katrina caused the US Dollar to lose pips against the Euro in the immediate aftermath of the event on August 25, , because speculators believed that the government would incur additional deficit spending to rebuild New Orleans.
These damage consumer and business confidence, hampering economic growth. They also increase the likelihood of war, and consequently, a budget deficit to support associated spending. The attacks caused the dollar to lose pips against the Euro in the immediate aftermath of the event, and it signaled the beginning of a 7-year bearish cycle for the dollar as the Bush government beat the drums of war.
War is destructive to everything and everyone it comes in contact with, including fiat paper currencies that are used to help fuel it. Every major war in the past century has brought inflation to some degree. The big reason is that wars are massively expensive and must be paid for somehow. Wars require resources that civilians would otherwise use that need to be diverted to the war effort. Wars require deficit spending, which is inflationary in itself, but it is a deficit spending quite different from domestic deficit spending.
However, wars are special in that vast amounts of money are spent on things meant to be blown up or technology not later needed by civilians , so you have the double whammy of money staying at home to work its evil magic, while the goods disappear in exploding bombs that have no residual benefit.
Prices and profits rise while wages and their purchasing power fall. Confidence in or wariness of a new administration can cause investors to flock to or flee from the home currency. Money is attracted to strong, effective leaders. If the new leaders are voted into office and do not have the confidence and wisdom to run a country effectively, then money will leave the country.
If the new leaders want to borrow and spend more money on social programs or foreign wars than they can collect in taxes, money will leave the country. If the new leaders want to nationalize any major corporations or industries, money will leave the country.
If the new leaders want to impose sharp tax increases or unnecessary regulations, money will leave the country. The rule of thumb is money is attracted to governments which are modest in ambition and friendly to business and investment. When other countries are in a state of conflict, their respective currencies may be perceived as unstable. It used to be that investors would flock to the US dollar as the safer bet. Sometimes this is still the case.
History has shown that when oil-rich countries have trouble, then the US dollar falls when oil prices surge. Increasing oil prices cause inflation and dollar devaluation, and investors flee to other safe haven monetary instruments such as gold. Flight to safety means that traders move their money from one country to another in response to global financial risk. It used to be that the US dollar was the de facto currency that investors would turn to in response to increased global financial risk.
Sometimes this still holds true. For instance, in the banking crisis of , investors fled to the safety of the US dollar as all the markets in the world crashed. But increasingly, with the steady weakening of the US dollar and investors worried about the European sovereign debt and US debt ceiling, investors have been fleeing to gold and Swiss franc. Gold has a been see as a real monetary instrument immune to inflation as opposed to a fiat paper currency doomed to inflationary extinction.
The Swiss have both a fiscal and current-account surplus, a low inflation rate and relatively low debt-to-GDP ratio, and consequently, investors flee to the safety of the Swiss franc when the Swiss Central Bank does not overly manipulate it.
Forex Fundamental Analysis Fundamental analysis is. Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect currency prices. If you think. Since fundamental analysis is about looking at the intrinsic value of an investment, its application in forex entails looking at the economic conditions that.