Education
Fundamental Analysis
"Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity"
There have been always a great controversy between traders that use technical analysis and traders that use fundamental analysis. However the safest approach would be to use both.
Fundamental analysis is the study of present and future forces that would influence price action (supply and demand), this forces could be of social, political or economical nature. Fundamental analysis is usually used to predict long to medium term movements in the Forex Market.
There are innumerous ways to analyze a set of data. Each of us can look at the same data and come up with completely different analysis and conclusions on how about the market will react to it. Therefore is important that the trade have a plan and an understanding of the data to be analyzed.
In very simple words, fundamental analysis would be everything that makes a country to "move", for example: interest rates, oil prices, central bank policies, natural disasters, GDP, elections, etc.
It's also important to note that the Forex markets tend to anticipate events by discount them in the value of the currency. This can bring advantages or disadvantages to the Forex trader (accordingly to the timing).
In another hand there are times that the market doesn't reflect immediately the impact of a certain data/information, sometimes it will take some time for the market to realize that a certain indicator (or even interest rate) is out of tune.
There are certain reports that takes part on the agenda of a fundamentalist traders, below are some of the reports that have impact on the american economy, therefore impacting on US Dollar.
The Consumer Price Index measures the average change in prices for a fixed basket of goods and services.
Labour Department Bureau of Statistics
One of a series of manufacturing and trade reports. Focuses on new orders
Commerce Dept. Census Bureau
A survey of households providing very timely information on the rate of unemployment
First Friday of the Month
Labour Dept. Bureau of Economic Analysis
Gross Domestic Product measures the value of items produced with US
Commerce Dept. Bureau of Economic Analysis
Measure new residential units started. Most significant for the financial markets during turning points in the business cycle.
Commerce Dept. Census Bureau
Industrial production measures output in manufacturing, mining and utility industries
A measure of consumer spending, reporting on sales of both non-durable and durable consumer goods.
Commerce Dept. Census Bureau
The Producer Price Index measures the average domestic change in prices, less discounts received, by wholesale producers of commodities
10th Business Day of statistics
UNEMPLOYMENT INSURANCE CLAIMS
Reflects actual initial claims for unemployment insurance filed with state unemployment agencies.
Labour Dept. of Employment and Training Administration
How Interest Rates affect the Forex Market?
Let's take the United States as an example. When the Federal Reserve raises U.S. interest rates, the US Dollar is very likely to rise.
Interest rates are a great influence in supply and demand, specially in the short-run. Banks, companies and rich individuals want their money wherever they can get the highest interest. So if interest rates rise in the USA, they will want their money to be invested in american banks and they will need US Dollars to do it. Thus if interest rates rise in the USA, the US Dollar will appreciate and a decrease will result in a depreciation.
I you have the conviction that the Central Bank (Fed) would increase the interest interest in the next meeting, you could capitalize buy buying US Dollars, thus anticipating the move up.
How Inflation affects the Forex Market?
Purchasing power parity does well at explaining how inflation affects exchange rates. Suppose there is 100% inflation in Russia and 0% inflation in the U.S. Wheat now costs 3000 rubles a bushel in Russia.
So, the exchange rate should be $1 = 1000 rubles.
Therefore, when the foreign inflation rate is greater than the U.S. inflation rate, the dollar appreciates against the foreign currency.
This could be where a Forex trader would find a opportunity to buy US Dollars.
How Inflation affects the Forex Market?
Oil is one of the world's basic necessities - at least for now, most people in developed countries cannot live without it.
Stock market traders know how important is the role of oil prices and how it impacts their portfolio. Since a rise in the oil prices will have a negative impact on stock prices of companies that are dependent (in some shape or form) of this commodity.
This applies to the Forex market too, since countries are highly dependent on oil, this will impact on the value of its currency. Let's look at an example: USA is highly dependent of oil, which means that a increase on oil prices, will have a negative impact on the US Dollar.