Traders in the Forex, (foreign exchange market) use two basic forms of analysis to make buying and selling decisions: technical analysis and fundamental analysis. Technical analysis in Forex includes a variety of formulas for analyzing historical and current price data as predictors of future prices. Fundamental analysis in Forex involves looking at a country’s economic conditions affecting the value of its currency.
Economic Indicators
Economic indicators are reports released by the government or a private organization detailing a country's economic performance. Governments release reports on aspects of a country’s economy at scheduled times, generally set by law. These reports give the market an indication of the status of a nation's economy. In Forex, the information in these reports can cause have significant effects on a currency’s price and the amount of currency traded. Comparing the indicators of two countries can provide insight into the relative values of currency pairs.
The Gross Domestic Product (GDP)
The GDP is the broadest measure of a country's economy. GDP is the total market value of all goods and services produced in a country during a given year. The GDP figure shows a historical picture of a nation’s economy. The advance report and preliminary report are available months prior to the release of the final GDP. If there are significant variations between these reports, this can cause major movements in currency pricing.
Retail Sales
The total receipts of all retail stores in a country comprise the Retail Sales Report. The Retail Sales Report provides information about consumer spending patterns accounting for seasonal variations. The Retail Sales Reports are timelier than most other reports and help predict an economy’s direction.
Industrial Production
The Industrial Production Report reveals changes in the output of a country’s factories, mines and utilities. These changes in output may be viewed to reflect the collective outlook of the managers of the businesses, making decisions related to their expectations of the economy’s performance. Included in this report is a measurement of capacity utilization. When the output is nearing capacity, it bodes well for economic expansion, and an increase in currency value.
Consumer Price Index (CPI), Measurement of Inflation
The CPI is a measure of the change in the prices of consumer goods across over 200 different categories. This change is used in combination with others to estimate future expectations in interest rates. While counterintuitive, since an increase in inflation means less purchasing power for a currency, it often means that interest rates will soon be increased by the central bank to combat inflation. An increase in interest rates often increases a currency’s value.
Unemployment Rate
The Unemployment Rate is an economic fundamental that impacts currency value, as a picture of economic health and the expectations of business managers. When businesses are hiring, the collective wisdom is a belief in economic growth. When businesses either are shedding employees or at best stagnant, then expectations are either gloomy or uncertain. Changes in the Unemployment Rate are announced regularly, impacting the Forex market.
Interest Rates
While not strictly a report on a country’s health, interest rates in a country are a key fundamental for Forex traders. A country’s central bank makes regular decisions on critical interest rates that ripple through the economy. A currency with an interest rate higher than that of another currency provides a higher rate of return, so generally an increase in interest rates strengthens a currency.
Forex Economic Fundamental Calendars
Active traders in the Forex market keep calendars which show when important fundamental factors affecting a currency’s value are scheduled to be announced and set up trading plans based upon the timing of these announcements. These calendars are kept for not just the announcements of one country, but rather for the countries whose currencies the trader is most active with. It is important to remember that currencies are traded in pairs and the economic fundamentals of both countries must be considered in developing a strategy regarding the currencies' relative values.
There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of Forex. It's important to understand the meaning of Forex economic fundamentals and how they affect a nation's economy.
David J. Shestokas - Mr. Shestokas is a former prosecutor & writes on the Constitution & legal issues for the Save America Foundation & Suite 101.
Join the Conversation