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Fundamental Analysis – A Forex Trader’s Route To Informed Decisions

February 14, 2019 Posted in Forex Trading News by No Comments

As a trader or potential trader, you have to consider a number of options when collecting the information relevant for making informed decisions. These are often simply broken down into two main types, fundamental and technical analysis. Both styles demand the learning of certain skills if you want to make effective decisions on which currency pairs to trade on and when.

Maybe as a trader, you are thinking of trading in the popular AUD/USD, also known as the Aussie. Before making your decision, it is imperative you spend some time making sure your information is up to date and relevant. So, what would be of interest to a Forex trader? To understand this, you have to look slightly more in-depth at what fundamental analysis actually is.

Fundamental Analysis & Micro-Economic Indicators

This is a collective term for gathering as much information as possible about what could affect potential currency trades. This includes keeping an eye on the political, social and economic forces that can affect the supply and demand of the currencies.

How do you do this? The study of informative data from government agencies, central banks and the private sector can give a trader the macro-economic analysis needed. This can help to interpret what is occurring in the markets and the strengths and weaknesses of that country’s currency. Data indicators such as:

Fundamental Analysis
  • Labour market
  • Economic growth
  • Trade
  • Housing data
  • Retail sales
  • Geopolitical events

This data, along with current news, is systematically followed to help put together a picture of that country’s economic strength. By comparison to other countries, it then points a trader in the right direction for potentially good trading opportunities. There is a plethora of information being made available, and it can be overwhelming to a novice trader as to what is essential and what is not. Obviously, all types of data are relevant, but some are slightly more so than others.

Central Bank Announcements

Interest Rates

As one of the leading indicators of movement in the Forex markets, a country’s Central Bank announcement on interest rates is essential data, as these decisions facilitate that country’s economic environment. Central Banks control the ebb and flow of investments within a country; as they make the decisions to raise or lower the interest rates. These, in turn, can dramatically affect the Forex currency market by stimulating change and volatility within the market. All these events can give rise to potentially good trading opportunities.

Monetary Policy  

When a Central Bank decides to change its monetary policy it can also have significant effects. Events such as Quantitive Easing should start the bells ringing for traders as this decision can set off dramatic swings in the Forex market. Quantitive Easing, or QE, is when a Central Bank makes large asset purchases of government bonds and other financial assets. This is done to stimulate the economy, lower interest rates and increase liquidity.

Remember:-

*A rate rise usually causes that country’s currency to strengthen

*Lowering the interest rate, or introducing Quantitive Easing can see a country’s currency weaken

GDP – Gross Domestic Product

This is a figure that gives a measure on the value of everything that is produced in that country over a specified period of time, typically one year. It will include everything produced by citizens or foreigners if made within the countries boundaries. The GDP figure is, therefore, an excellent indicator of the health of a country’s economy.

Before the yearly announcement of the GDP figure, it is considered a lagging figure. Traders focus more on the two reports that come in the months before the Preliminary Report and the Advance Report. The critical aspect for traders here is to look for any revisions between these two reports which can create significant volatility in the Forex market.

Remember:-

*A growing GDP indicates the country is flourishing

*A lessening GDP shows the country is making less money and becoming less competitive

At the end of 2018, Australia’s GDP was ranked 15th in the world, the third quarter showing a growth of 0.3% over the last quarter. The figures are issued quarterly and annually.

Inflation Data

The Consumer Price Index, or CPI, is the data you want to watch for an indication of what is happening to a country’s inflation rate. This is the statistical estimate of a typical household shopping basket of consumer goods, plus services such as transportation and medical care.

The price is calculated by taking the amount of each pre-determined product or service and averaging them. This is a ‘weighted average’ where certain items of importance are given a ‘weight’ to multiply the value before averaging.  

Inflation is tied to the purchasing power of a currency, which leads to the country’s Central Banks increasing basic interest, which then helps make a currency more attractive in the Forex market. In the US the CPI figures are issued every month, and in Australia, they are released every three months at the end of March, June, September and December. In December 2018 the CPI rose 0.5% following a rise of 0.4% in September 2018.

Remember:

As a general rule, if the CPI is increasing it indicates inflation is also, and the economy is getting stronger.

Trade & Production

If the products or goods of a country are in high demand, it usually follows that the country’s currency will also be in high demand. It is always a good idea to identify trustworthy sources, like the country’s trade balance with a price index. In Australia, also keep an eye on the Australian Manufacturing PMI (performance management index), and the Australian Industrial Production, a monthly report reflecting the output of businesses in the mining, manufacturing and utility sectors.

These, alongside the CPI, GDP and Federal Reserve Figures, can be used to formulate a Forex purchasing decision before opening a long term position. For short term positions, reading these reports helps in deciding whether to sell or buy. Here, you are looking for the difference between the estimated figure and the actual figure. If falling short or increasing, this will have an almost immediate effect on the short-term Forex market.

Retail Sales & Housing

Retail Sales & Forex Trading

Retail sales figures are released monthly in Australia and are a good indicator of the overall strength of consumer spending, the countries economic stability and the directions it is taking.

Housing is also an important area to keep an eye on as this data affects the Central Bank’s decisions to increase, cut or maintain interest rates. A slow down in house price increases could be indicative of an interest rate cut.

Recently in Australia, the housing market has been a topic of conversation and concern. December 2018 saw a downward slump intensifying with prices at the lowest for a long time. Predictions made on this suggested the prices will continue to drop over the first half of 2019, with some even anticipating that the slump will have a dragging down effect on Australia’s GDP growth. However, as of early February 2019, the Reserve Bank of Australia was maintaining its interest rates.

Geopolitical Influences

Changes in the political stability of a country, government policy changes and political unrest within or between countries can all seriously affect the Forex market. As such, traders need to keep their finger on the pulse of such events. At the beginning of 2019, the Australian traders were not only keeping their eyes on the unsettling house prices, but on the trade war between China, our biggest trading partner, and the USA. These events are leading to bearish indications for the AUD/USD. However, hope is placed in the retail sales figures released for December 2018. Published later in February 2019, they may indicate a move towards a more bullish AUD.

Which Analysis To Choose?

There is no one answer to selecting your trading position, as any Forex trader needs to take into account the range of issues affecting a country and its economy. Interpreting the data available is a necessary skill. Forex trading is about collecting information relevant to the currency you are interested in, information that will then help you make decisions on your trading positions.

Remember, there is no one way to collect information and data. Do you choose fundamental or technical analysis?  Some traders prefer one method over another, but combining the two can also be the way forward, certainly with the internet and the number of resources available to help you make that decision.

Fundamental analysis is not an easy option, it does need some effort on the part of the trader. To improve your trading abilities you could consider using both analysis styles to get a more complete picture of what is happening in the market. Technical analysis can tell you how price and volume are changing on the charts, giving excellent intraday trading pointers. Using fundamental analysis, you can look at how the economic landscape is affecting your currency pairs.

As evaluations are comparative, this will include the aspects of both countries of the asset you are considering. Fundamental analysis can provide an overall temperature of the market; things like is there going to be more moves up or down, or is the market still uncertain? The macro-economic factors let you know what is happening with a market, as they are indicators of when to stay put, when to get out and when it might be disadvantageous to trade. Keeping your eyes continually on what is happening worldwide is imperative to being successful as a Forex trader.