How Fundamental Analysis Helps to Conduct Forex Trading

The majority of Forex traders rely on technical and fundamental analysis when choosing a strategy. Find out what Forex fundamental analysis is.

Forex Fundamental Analysis

The adjustment of the economic and political life of society is majorly affecting the outcomes of Forex fundamental analysis (FA). These are changes that often lead to a predicted change of currencies. With the help of this method, brokers are getting up-to-date information on the level of inflation, unemployment, and the latest political trends that are available through the news.

What’s the Fundamental Analysis?

Such type of research gives some ideas of ​​changes in currency prices due to the development of a particular situation in the economy. To follow the Nigeria stock trading, experts are analyzing the development of the market situation, especially the entry and exit points, to draw the relevant conclusions and make their forecasts.

The Forex market also correlates with the principles of supply and demand. The demand/supply rate and market activity are determined by many factors, such as interest rate and the stability of the economic situation.

What Are the Components of FA?

FA involves evaluating the following factors affecting exchange rates:

  1. Economic growth rates (gross national product, manufacturing value, etc.);
  2. Interest rate level;
  3. The trade balance and the dependence on external sources of raw materials;
  4. Growth of money volumes in the domestic market;
  5. Inflation rate and inflation expectations;
  6. Speculative operations in the foreign exchange market;
  7. The level of development of other sectors, for example, a securities market, etc.

Such a review is not easy to make. The same factors under different conditions have an unequal impact on the market or may become decisive. The economic stability depends on the GDP, the volume of foreign investment, and the country’s trade balance.

Thus, the success of the trader in conducting FA depends on an understanding of the laws of finance, the ability to compare unrelated events. Therefore, an analysis often compares the indicator for one country at different time intervals, and rarely, for example, the US unemployment rate with the European one.

How to Find Information for Analysis?

Many key indicators are available in the relevant media and published on the pages of specialized journals, newspapers, and network resources by government and academic institutions once a week or once a month:

  • Forbes gives comprehensive information regarding entrepreneurship, business, innovations, etc.
  • The Economist explains the expert evaluation of world markets by regions and presents a niche blogs’ section on various topics.
  • The World Bank is among the most respectful world institutions, which provides the latest data by regions and countries.
  • International Monetary Fund conducts the latest economic figures in the form of outlooks on various topics.

These are only common suggestions you can use when looking for the latest news of major economic indicators. These factors are taken into account by the traders. FA involves the use of various indicators, but the key ones remain. They are the interest rate, the consumer price index, international trade level, etc.

What Influences the Growth of Foreign Investments?

The high-interest rate often causes growth in foreign investment. The currency is getting stronger or, on the contrary, getting weaker depending on the size of the interest rate. On the other hand, an increase in the interest rate often becomes a signal for investors to sell their securities. At the same time, an increase in the difficulty of obtaining a loan will adversely affect the efficiency and profitability of companies. The sale of market shares by investors leads to a fall and negatively affects the economy of the country as a whole.

What Makes the Currency Devalue?

International trade reflects an indicator of foreign trade deficit, that is a situation in which a greater volume of products is imported than exported. A trade deficit means that the amount of money leaving the country exceeds the amount that arrives in the country. This situation is considered negative, as it contributes to the devaluation of the national currency.

If the indicator of foreign trade deficit for a country remains stable for a sufficiently long time interval, then it does not reflect so clearly on the price of the currency. But if the foreign trade deficit exceeds market expectations, the price of the currency may change significantly.

Why Consider the Consumer Price Index?

Among the vital figures that influence the decision in favor of a particular strategy, FA considers the indicator reflecting the consumer price rate and prices of manufactured goods. The GDP, measured as the number of all goods and services made in the country, and the monetary policy, which determines the total amount of currency in the country, are also taken into account.

Central Banks – Do They Matter?

From one point of view, the monetary policy of the Central Banks is the strongest factor. A “soft” policy (low rates and non-traditional monetary measures) leads to a currency decrease, and a “hard” (high rates) leads to its strengthening. The higher interest rates, the more expensive it becomes for commercial banks to borrow, i.e., the cost of borrowed funds increases.

These Central Banks are quite important to pay attention to:

  • The US Federal Reserve System. Formally, the Fed is a private organization (a joint-stock company with a special status of shares), but it is managed by the state. Since January 2014, Janet Yellen has been the chairman of the American regulator, and her predecessor during the years of the global financial crisis was the well-known Mr. Bernanke.
  • The European Central Bank creates the monetary policy of all regulators of the Euro area. The ECB was founded in 1998.

You can get detailed information about the activities of regulators on their official websites.

In conclusion, if we put all this together, we shall get a rather clear picture. What are the main factors of Forex fundamental analysis do you use? Share your ideas in comments.

Post published in: Business

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