The main drivers of a currency’s value are the geopolitical atmosphere and economic situation of a country. It is important that forex traders understand how fundamental economic indicators impact price action. So, what do we mean by fundamental analysis?
What Is Fundamental Analysis?
Fundamental analysis in forex trading means examining a currency’s strength by analyzing a country’s macroeconomic indicators and geopolitical factors. Forex traders use these indicators to gauge whether a currency is undervalued or overvalued. More so, these indicators and geopolitical factors can help you determine the market trend after they have been made public. Like in any other market, the value of currency pairs in the forex market is driven by the forces of demand and supply. It is, therefore, vital for forex traders to understand the factors that drive the demand for a particular country’s currency to maximize their profits. This article will help you understand how to read and interpret the various fundamental indicators in forex trading. Also, the impact of the fundamental indicators on price action is not the same. When they are published, every fundamental indicator affects the forex market differently. Some produce more massive price swings than others.
Understanding The Economic Calendar
Like any other calendar, the economic calendar gives the date of the release of economic indicators and their significance in moving the markets. It is, obviously, tiresome to keep track of the publication of all the relevant indicators that could affect the forex market. Reputable brokers provide traders with a real-time economic calendar which compiles all the relevant information from various outlets. The economic calendar shows the date and time when the indicator is announced, the previous statistics about the indicator, and the consensus (i.e., prediction) among economists and analysts. The calendar also shows which currency the indicator affects. You can customize this calendar to suit your trading needs: whether you want only to view high-impact releases or only releases that affect a specific currency.
Other than the economic calendar, Respectable brokers provide traders with professionally curated and up-to-date market news. The news gives insights on geopolitical events that potentially affect the forex markets. Forex traders must incorporate the use of economic calendars in their trading routine to avoid being caught on the wrong side of price swings. Based on your forex trading style, using the economic calendar will help you time your trades with the publication of these economic indicators. Furthermore, the economic calendar will enable you to close any significant position ahead of the high-impact announcement. Depending on your trading preferences, the economic calendar enables you to time your trades with the publication of the economic data. Therefore, with the economic calendar, you can take advantage of the volatility that accompanies the publication of the economic indicators.
Economic Indicator Reports
The government and private companies regularly publish economic indicator reports. These reviews include statistics on the country’s overall economic health. There are hundreds of these indicators that directly influence the financial markets. In fact, studies have confirmed their impact on currency and trade. Some are used to predict an economy’s future direction. Others point to it’s current state. Hence, economic indicator reports are particularly useful to investors like new forex traders.
How To Apply Fundamental Analysis
Let’s take the USD, for example. The strength of the USD relative to other currencies is tied to the US economic performance. If an indicator suggests that the US economy is underperforming, the USD will weaken relative to other currencies. However, the USD will appreciate if the released economic indicator suggests that the economy is performing better. The magnitude of the price movement will depend on whether the indicator is a high-impact of a low-impact fundamental indicator. There are several economic indicators published daily. In this article, we will give an example of one high-impact and one low-impact indicator to show you how the market responded to their release. It is worth noting that the main factor that impacts the forex market is the interest rate policies. Thus, traders always use the fundamental indicators to anticipate the future monetary decisions that central banks will implement. However, some indicators show the actual state of the economy during a given period.
On September 4, 2020, at 2.30 AM ET, the US Bureau of Labor Statistics released the monthly employment report. The unemployment rate was 8.4% better than the anticipated 9.8%. The unemployment rate is a high-impact indicator. The publication of the report resulted in a broad price change witnessed by the long bearish candles. The announcement of the better than expected unemployment data resulted in the strengthening of the USD against the EUR. The release of the data was significant enough to alter the market trend. On September 8, 2020, at 3.00 PM ET, the US Federal Reserve released the monthly Consumer Credit data. The consumer credit for July was $12.25 billion, worse than analysts’ expectations of $13.75 billion. The consumer credit report is a low-impact fundamental indicator. The announcement of the consumer credit data had no significant impact on the price action. The report did not alter the prevailing market trend.
The fundamental indicators show how a country’s economy has progressed over a given time or how it would fare in the short run. However, a forex trader must consider the analysts’ consensus since the market reaction often depends on whether the actual data is better or worse than the analysts’ expectations. When the data is better than expected, the market would be bullish towards that currency. If the indicator underperforms the expectations, the market would be bearish towards that currency. However, when the data is in line with what analysts expect, the effect on price action would be dampened. It is also vital for traders to consider the historical impact of the release of the various fundamental indicators. This historical perspective will enable you to gauge the average effect of the individual indicators more accurately. More so, forex brokers have a daily market analysis to make your fundamental analysis better informed. It is worth noting that some extreme volatility and slippages might accompany the release of the fundamental economic indicators. Credible broker provide all its traders with negative balance protection in case you are caught on the wrong side of a trade.