Do you want to develop your trading career based on fundamental analysis? If you are interested in fundamental analysis in forex trading, the following article is for you. In this article, we will discuss the top 4 fundamental indicators that a trader must know. After completing the whole article, you will see the core logic behind the forex market’s price movement.
Technical analysis and fundamental analysis are core parts of forex trading. In technical analysis, analysts anticipate the future price of a currency pair based on the past data. Conversely, fundamental analysts research various economic data and events and predict the price movement based on events, data and situations.
What is Fundamental Analysis?
Trading on the fundamental analysis is known as trading based on news and economic data. Fundamental analysis focuses on studying news events and economic statistics to determine future trading opportunities in the currency market.
In fundamental analysis, analysts pay very close attention to various economic factors such as GDP, employment rates, interest rates, inflation, etc. It is essential for traders as the forex market is moved by macro and microeconomic events, geopolitical situations, and their relations.
However, the forex market’s key player is central banks who directly intervene in the currency’s price by setting economic goals. As a trader, you have to be aware of the economic events and data to predict the price based on the news release.
Top 4 Fundamental Indicators for the Forex Market
There are many types of fundamental data that are being published every day. But, if we take into consideration every data, it will only make trading complex and unrealistic.
Therefore, while scrolling to the economic calendar, make sure to focus on essential releases only. Most economic calendar providers distinguish the news based on high impact, medium impact, and low impact. So, it will not be difficult for you to find the top 4 fundamental indicators that you should care about.
In the following section, we will see the details of the top 4 fundamental indicators, but before that, let’s list them:
- Interest Rate Decision
- Consumer Price Index (CPI)
- Unemployment Rate
- Gross Domestic Product (GDP)
Let’s have a look at these, one by one.
#1 Interest Rate Announcement
The Forex market works by taking advantage of the gap created by the exchange rate fluctuation of different currency pairs. The relative difference in interest rate works as a critical factor for influencing the exchange rates worldwide.
World’s central banks are the highest authority to determine the Interest rates, and it is the leading indicator for setting price directions.
“Interest rates are the percent imposed by central banks for lending money to other private and commercial banks.”
If the interest rate increases, it comes up with more value to the corresponding currency. On the other hand, the lower interest rates reduce the appeal of the currency. Due to the fluctuation of interest rates, a particular currency’s demand and supply always keep changing.
A better than expected interest rate will make the currency stronger, while the weaker than desired result would make the currency more vulnerable. A trader should monitor these releases closely to find a suitable trading opportunity.
Interest rate largely depends on GDP growth, inflation, economic projections, and other macroeconomic factors. Unexpected interest rate change causes high volatility in currency pairs. So the primary task of a forex trader is to monitor the interest rate to predict the target currencies’ long-term trend.
The interest rate is a power booster of the economy, so it plays a significant role for Forex fundamental analysts’. When a country’s economy is balanced and well regulated, sometimes the central bank may increase the interest rate.
As a result, they can cut down the liquidity flow and dwindles the economy by reducing the inflation rate. Consequently, it reduces customer’s spending and helps the economy recover to a better manageable level.
#2 Consumer Price Index
The Consumer Price Index (CPI) contains the weighted average price of a household basket of goods and services with a base value of 100. For instance, if today a particular product costs X USD to buy a set of goods or services, the CPI (Consumer Price Index) will read 100. The next 10 years will cost 20% more, and the CPI index will have jumped from 100 to 125.
Forex traders perceive both unemployment and inflation figures as an indication that there could be a central bank’s decision to prevail interest percentage levels.
The Consumer Price Index (CPI) is a significant indicator of pricing requirements in an economy, and it also provides a gauge of inflation. As a forex trader, it is essential to monitor the CPI.
The increase in CPI inflation is suitable for a currency, while a CPI decrease is terrible. Moreover, central banks might alter the rate to keep it in line with the interest rate. So, as a trader, you should closely monitor the relationship between the CPI and interest rate, and any imbalance would be a potential trading opportunity.
#3 Unemployment Rate
When a country’s unemployment rate increases, governments try to boost the economy by creating new jobs.
The unemployment rate is one of the most significant indicators of a country’s economic state; thus, it also significantly affects a currency’s financial stability and shifts in foreign exchange rates.
The total percentage of unemployed people is a part of the population that directly affects spending behavior. These unemployed people play a role in the economy as a whole. A rise in the unemployment rate harms the economy because fewer people are now getting paid regular wages than they used to get in the past.
The country’s unemployment rate can show forex traders the future of possible monetary policies that directly impact the currency value.
There are reasons behind the increased unemployment rates that include Downshifting companies or companies forced to adjust their business models due to decreasing demand for goods or services.
When the unemployment rate is very high, the government will try to improve the depressed economy by creating new jobs. However, sometimes the government struggles to cope up with the situation and provide a dovish tone.
Traders can make money immediately as soon as the news releases. If the unemployment rate comes below the expectation, the price will fall immediately.
Moreover, you can get a fundamental price direction based on the unemployment rate and interest rate decisions. You can enter the trade as soon as the direction matches your strategy.
#4 Gross Domestic Product
Gross Domestic Product describes the total financial value of goods and services provided over a specified time in a particular country. We can also say GDP is the overall productivity of a country’s economic situation and is used to estimate the level of business growth and the economy’s health in general of a given country.
The GDP report is considered one of the many macroeconomic indicators. It is used to measure the performance of a country’s economy. In forex markets, there are numerous GDP reports released that indicate the GDP at different periods.
The GDP report is viewed as a Tier 1 report, meaning it has a high-impact on the forex market. When the GDP reports get published market moves strongly because of that report. The volatility increases based on how strong the actual result comes in compared to the forecasted estimates.
The impact on a currency pair depends on many factors, so forex traders should keep an eye on GDP reports timely. Forex traders should always keep in mind that the market does not react in the same direction after publishing the GDP report.
How to Trade Based on Fundamental Indicators?
These four fundamental indicators are key drivers for currencies in the forex market. Moreover, they are interrelated to each other. Therefore, as a trader, you should know the technique to evaluate the performance by determining changes. Let’s have a look at the key relationship between these indicators:
|Interest rate increase||Good for the currency|
|Interest rate decrease||Bad for the currency|
|CPI increase||Bad for the currency|
|CPI decrease||Good for the currency|
|Unemployment increase||Bad for the currency|
|Unemployment decease||Good for the currency|
|GDP increase||Good for the currency|
|GDP decrease||Bad for the currency|