Here we look at some of the major fundamental factors that play a role in a currency's movement. 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. P: R:. Search Clear Search results.
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Trusted by serious traders for 30 years Why choose CMC? Log in Start trading. Home Learn to trade Trading guides Fundamental analysis. See inside our platform. Start trading Includes free demo account. Quick link to content:. What is fundamental analysis? Bottom-up fundamental analysis A 'bottom-up' approach in fundamental analysis is perhaps the most common.
Understanding fundamental analysis: how does it work? How to conduct fundamental analysis. Open an account. Explore the financial markets. Fundamental analysis is particularly effective for stocks and forex. Read about how to calculate important financial ratios. Analyse growth potential, balance sheets, cash flows and debts of the company. Use risk-management controls when placing a trade. Fundamental analysis strategy Fundamental analysis techniques vary depending on the type of asset class that is being analysed.
Fundamental analysis of commodities Fundamental analysis for commodities is based on either increasing or decreasing levels of supply and demand. Analyse over 10, financial assets. Start with a live account Practise with a demo. Government bonds gilts Corporate bonds. Fundamental analysis ratios. EPS earnings per share. Companies with higher EPS are more profitable. PEG price-earnings-growth ratio.
A PEG ratio of over 1. Nevertheless, traders should remember to compare against the industry average. Any stock under 3. ROA return on assets. Gives a quick insight into how efficient a company is in transforming assets into income. Calculated by dividing total income by total assets. ROE return on equity. Measures how efficient a company is in returning income to its shareholders.
Calculated by dividing total income by total shareholder equity. Profit margin. Profit margin measures the efficiency of how a business can turn sales into profits. To calculate the profit margin divide net income by net sales. Liquidity ratios Liquidity ratios form a class of metrics to measure a company's liquidity, that is, how able a company is to pay its short-term debts without raising capital. Current ratio. The current ratio is calculated using the balance sheet.
Its formula is current assets divided by current liabilities. A company with a ratio below 1. Businesses are stronger when their current assets exceed current liabilities. Quick ratio. Calculate the quick ratio by taking the difference between current assets and inventory.
Then, divide this figure by current liabilities. This is because the liquidation of a company's inventory could take months to sell. Powerful fundamental analysis on the go. Open a demo account Learn more. Interest coverage ratio. Measures how many times a company can make interest payments on its debt with its earnings before interest and taxes EBIT. Efficiency ratios Efficiency ratios measure how efficient a business is regarding its operations.
Asset turnover. Similar to ROA, asset turnover shows how efficient businesses are at generating sales from their assets. Calculated by taking a company's total sales and divide by its total assets. Inventory turnover. This measures how many times a company has sold and replaced its inventory. Calculate by taking COGS cost of goods sold and dividing it by average inventory. Does fundamental analysis work? Disadvantages of fundamental analysis. It mainly applies to long-term investing and cannot be relied on for predicting short-term price action.
Markets may react faster than the events that are reported, potentially jeopardizing your trade. It can be a lengthy process.
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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.