Welcome back, traders! We hope you have enjoyed our overview of the Technical Analysis and are ready to learn even more! Today, we are going to discuss the importance of the News and what Fundamental Analysis is!
What is Fundamental Analysis?
It is an approach where economic, financial, social and political factors are being considered and analysed to understand their impact on the future conditions of an economy.
It is an approach based on the belief that the future economic outlook of any given country will affect the strength of its currency. The strength of the economy will be affected by various economic fundamentals, including financial statements, political events, environmental reports, data releases or other various major announcements. Following and understanding these will enable you to try and predict the future conditions of an economy in the medium to long term. As such, Fundamental Analysis should not be used on its own as it provides little information to help you predict future price movements in the short term.
As you know, you can catch these short term opportunities with Technical Analysis! We’ve already covered Technical Analysis in our previous lessons. We encourage you to try and use both when analysing the markets!
But what are the fundamental factors that you should be aware of? Let’s take a brief look into some:
Inflation is (ideally) a moderate increase in the price of goods and services. It comes with the economic growth of the country and can affect exchange rates. Various indicators will help you better understand the current growth and inflation levels, most common indicators to look out for are:
● The Customer Price Index (CPI) tracks inflation through purchasing power and the rise of prices for goods and services. It is most commonly released monthly by the relevant governing body;
● The Producer Price Index (PPI) measures the changes in the price of goods and services sold by producers. It is released monthly and represents a % change in the average prices purchased by manufacturers.
To keep inflation at a comfortable level, Central Banks may increase interest rates to slow down the economic growth.
Interest Rate is one of the biggest factors when defining the perceived value of any currency. Interest Rates are crucial when it comes to deciding where the global capital should go. Investors perceive countries with higher interest rates as those most likely to strengthen their currency over a long period. As such the interest rates will affect trading decisions and the perceived strength of one currency over another.
Monetary Policies are policies formulated by national governments and central banks. They are put in place to achieve countries economic goals - stable economy and growth. Monetary policies focus on interest rates, inflation, capital reserves, government securities, discount rates, money supply, and more. There are three defined types of monetary policies depending on their impact on the economy. Policies can be:
- contractionary (slowing economic growth, reducing the size of the money supply)
- expansionary (improving the economic growth, increasing the size of the money supply) or
- neutral (neither stimulates nor restricts the economic growth).
Speeches usually focus on the current state of the economy and are delivered by the presidents, governours of central banks, representative members of a central bank or during the Fed FOMC meetings. Traders listen and react to speeches and as a result, markets can become very volatile and extra care should be taken managing open or entering new positions.
Gross Domestic Product (GDP) represents the total monetary value of all outputs (goods and services) produced and sold within the country over a specific period. GDP enables accurate estimation of the size of an economy, its overall health and growth rate. From a trading perspective, a lower than projected GDP may result in a sell-off of the domestic currency. Lower than projected GDP can be used as an indicator that the economy is struggling to achieve healthy and steady growth.
Employment Data and especially Non-farm payroll (NFP) can also cause markets to become very volatile. NFP is a key economic indicator of the US economy; it confirms the total number of jobs (excluding farm employees, government employees, private household employees and employees of non-profit organisations). NFP measures the net change in employment, thus reflecting the current state of the economy. NFP results help determine future interest rates. If the job growth is strong the interest rates are most likely to raise to keep inflation at a comfortable level.
Buy the Rumour, Sell on the News!
When trading the news, you may experience that the market doesn’t always move in the expected direction! This is quite often a result of the impact that the big players have on the market and trades they took before the news was even released! Traders may enter their positions based on the market consensus (occurs when expert analysts agree on the forecast value/number before the news release) and adjust them after the actual data was released. The reported data can be seen as expected, better than expected or worse than expected, depending on how accurate the prediction was!
Now that we’re aware of what to look out for with our fundamental analysis, let’s quickly find out where to look and how to prepare ourselves for the News!
As a trader, you have to be aware of all major data releases or high impact events. They present you with valuable information on the strength of the economy and may provide you with a better idea of the future direction of the currencies you’re trading!
Of course, there are plenty of financial TV networks that broadcast 24 hours a day and provide you with the most up to date information at any time (such as Bloomberg TV, CNBC, CNN, etc.).
However, with the increasing ease of access to the Internet, you are more than likely to use specialist websites that provide you with 24/7 news coverage and commentary (such as Reuters, Bloomberg, CNBC, etc.), your forex trading platform or an Economic Calendar of your choice!
The good news is, most of the Economic Calendars are free to use and you can filter out news that you are interested in! You can choose between the expected impact (low, medium or high), the event type (such as inflation, employment, central banks, speeches and others) as well as limit the news to the particular currencies you’re interested in!
We hope you’ve enjoyed our Overview of News & Fundamental Analysis!
Remember, that at the end of the day, it is the news that can move fundamentals but it is fundamentals that can move currencies!
Make sure to join us next week! We are going to look at the Overview of Market Sentiment Analysis and wrap up our lessons on the Forex Market Analysis before moving onto Trading Plans!