Fundamental Analysis in the forex market is the art of predicting future price movements based on macroeconomic events and political developments. The forex market is the only market that can be traded successfully on both economic news and political news, as the commodity traded, currency, is backed by a nation and not just a company. So any change in the status quo of a nation can and will effect a nations currency. The forex market like all other markets are governed by the laws of supply and demand, thus the question all traders must ask themselves on release of news is: Will this affect demand for that currency positively or negatively?
All countries have a number of key economic and political indicators that have high impact on the market when released such as the Treasury International Capital (TIC) in the USA and the ZEW Survey for the Euro zone countries. To be a successful fundamental forex trader basing your trades on these news, means you must know what they mean and how they impact the market. It is not merely enough to understand the written value of key figures, rather you must know how to put that information into context. It is important to look at economic news compared to how the general expectations and consensus are on that information. Remember you are not trading on your assessment, but against all other traders and how they view the same information as you do.
In this article we will look at some of the high impact economic indicators for USD currency pairs.
The USD is still the worlds dominating currency even amid economic turmoil. Commodities of all sorts are quoted in USD especially the worlds most important such as Oil and Copper. When someone makes a trade anywhere in the world for such a commodity they are quoted a price in dollars even if the trade takes place far from the US exchanges.
Let’s take a look at some important US indicators and when they are released:
This is a high impact indicator that measures the difference between the monetary value of all exports and imports in the US. If the Trade Balance is negative or falling that means there is more dollars going out than coming in, thus increasing supply and lowering price. If the Trade Balance is positive or rising the opposite is true, there is a demand for USD thus raising price.
The Trade Balance Report is released monthly around the 10’th of each month.
Treasury International Capital (TIC)
This key figure measures the monthly difference in cross border transactions in securities (long term). If this figure is positive or rising that implies there is a demand for USD to purchase American securities. In turn this means that a positive trend has positive impact on the USD.
The TIC is released monthly around the 15’th.
Gross Domestic Product (GDP)
The classic measurement of economic growth calculates the value of all services and goods produced in a country trough labor and property. A positive trend implies a strong economy which is good for a nations currency.
GDP figures are released quarterly.
ISM Manufacturing Index
This index measures the business activity in the manufacturing segment of the economy and the survey is conducted monthly. Any number over 50 is indicative of growth and vice versa. A positive growth trend is positive for the USD.
ISM is released the first working day of each month.
Philadelphia Fed Index
This is a monthly survey of Philadelphia Federal Reserve District Manufacturers business conditions. A positive trend is a sign of a strong economy and good for the USD.
PFI is released around the 15’th of every month.
Durable Goods Orders
A measurement of the value of current orders for durable goods (Expected life of more than 3 years). One of the indicators of capital investment. Traders watch this one carefully because it predicts future production very well.
Released around the 25’th of each month.
Consumer Price Index (CPI)
Inflation rate development measured from the consumer level. CPI is the major measurement of inflation. Historically, if the inflation rate exceeds 2% pr. Year, the Fed will increase interest rates, which will in turn attract foreign demand for treasury notes and USD.
Released around the 13’th of each month.
Producer Price Index (PPI)
Another index measuring inflation but this time from the producers viewpoint. Since producers usually pass on any production costs to consumer, this one can be seen as consumer inflation as well.
Released in the middle of each month.
As the name suggests, the percentage of Americans currently without a job but still active in the job market. High unemployment is bad for the economy as consumers have less money to spend on goods which affects GDP negatively. Low unemployment means more spending and higher investments which affects both the economy and currency in a positive direction.
Released in the first week of each month.
Federal Open Market Committee (FMOC) Statement
The FMOC is the committee that decides short term interest rates in the US. They vote eight times annually on how to set the short term interest rate (Fed Funds Rate). A very important indicator that traders try to predict for the reason that interest rates are the major driving force behind currency prices.
Released every six weeks.
Federal Reserve Chairman Speech
One of the highly anticipated news of the economy as the Fed Chairman holds large influence over interest rates and therefore this speech gives an insight into the current agenda of the Feds monetary policy.
These are but some of the many economic indicators used in fundamental analysis. Knowing exactly when they take place is paramount for any trader. It is essential for any serious trader to have a forex calender with the dates and times of these events mapped in. There are many interactive calenders available online, with most being provided by the brokers.