Forex fundamental analysis is the strategy of predicting movements of individual currency pairs in the forex market by analyzing the underlying economic factors. Think of forex fundamental analysis the same way you would if you were to do fundamental analysis on a company’s public stock. You gather up the information and try to piece together the puzzle on how profitable the company is going to be. In the stock market the process is fairly simple. The main thing to analyze is the companies annual and quarterly reports. From this you can deduct some key indicators of profitability. When it comes to forex trading things get more complex because of the scale of the economy.
As a nations currency is a reflection of that nations economic status there is a lot of information to digest and process in order to get the full picture. There are interest rates, GDP, Consumer Price Index, Retail Sales and many more. All of which are an area of study onto themselves and continue to prove difficult to predict even for economists in that particular field. Many traders therefore respond more to news and announcements from the major players in the economy. This is why you often see the market moving at its most violent, and profitable, around news sessions. In this article we will look at three major announcements that become forex fundamental indicators.
Federal Open Market Committee (FOMC) Meetings
The FMOC meetings take place eight times a year and are set up to evaluate the recent effects of monetary policy and then to make the necessary adjustments if needed. This is the single most important event in Forex trading when it comes to volatility of prices. The reasons for this is that interest rates increases and decreases have a great effect on the prices of currencies and economics around the world.
U.S. Non-Farm Payroll
This important economic announcement and indicator is released every first Friday of any given month. The U.S. Non-Farm Payroll reports on the number of workers employed in the nations industry and government and as such is a strong indicator of the robustness of the economy. Traders speculate a lot on future announcements as strong numbers here often will send the USD rallying.
Gross Domestic Product (GDP)
Gross Domestic Product is the base of all economic key figures. It is used to measure a countries production, hence the name GDP. This indicators calculates the sum and value added of all products and services in country. It is the single one method that economists use to analyze if the economy is growing or shrinking. Growth in GDP signals strength and opportunity to investors while a decline indicates recession and therefore loss of opportunity.
In conclusion of this article, let us end by saying that news trading in itself is not for everyone. While trading on economic news can be very lucrative it can also be very dangerous for the inexperienced trader. Most traders that lose their money do so because they traded exclusively on news without enough knowledge and experience.