The use of forex fundamental analysis when trading generally consists of trading off of news, economic and financial releases and other information which will affect one or both sides of a currency pair. Also, the prices of key commodities will often influence the valuation of one currency against another.
Economic releases from the country - or countries, as in the case of the Euro - issuing a currency make up one of the fundamental analysis tools most employed by seasoned forex traders. In addition, forex fundamental analysis includes reviewing the daily world news where geopolitical and global events are closely watched by currency traders.
Key economic data for the various national currencies of interest is usually reviewed in forex fundamental analysis, although economic data from the United States makes up the most influential news in forex trading due to the U.S. Dollar's unique status as the world's premier reserve currency.
Generally, watching key indicators on the health of the general economy in the home country of both currencies of a currency pair affords the currency trader insight into possible changes in the valuation of the pair's exchange rate.
The list below includes the key economic indicators used in forex fundamental analysis which makes up the most influential data periodically released in most countries that directly affect the valuation of their currencies.
Gross Domestic Product or GDP - this very important economic indicator generally released either monthly or quarterly, represents the sum total of all goods and services produced in a nation. When this number is released, volatility in the currency which it affects tend to increase considerably, with a lower than expected number generally affecting the currency negatively. Conversely, when the number comes out better than the market consensus, this causes the currency to appreciate.
Trade Balance - also known as the balance of trade, this important forex indicator represents the difference between the value of a country's exports versus the value of a country's imports over a certain period of time. This number is especially important to forex traders because a large deficit - more imports than exports - will generally weigh on a currency's value. The reason for this consists in part because of the fact that imports will require the country to obtain foreign currency to pay for its imports. Conversely, a large surplus generally gives a currency support, in part because the demand for products from other countries will create demand for the domestic currency.
Interest Rates - the interest rate in a particular country often directly affects exchange rates, with higher rates of interest attracting more international investment. The interest rate in a country will also stimulate or dampen economic conditions domestically depending on whether monetary policy is loose or tight.
Employment Numbers - the health of a nation's economy can often be gauged by the percentage of the population employed. Employment numbers include: the Unemployment Rate, Initial Jobless Claims, Claimant Count Change (UK) and their equivalents in other countries. Positive employment numbers generally raise a currency's value, while rising unemployment will often adversely affect the value of a currency.
In addition to the above important economic indicators, a number of secondary indicators and factors often add volatility to exchange rates and make the market move considerably. These indicators include:
Inflation Numbers - economic releases such as a nation's Consumer Price Index and Retail Sales numbers exert a great deal of influence on a country's currency valuation. The reason for this consists in the fact that a nation's central bank's monetary policy often requires strict control of inflationary pressures, tightening when inflation runs high, and loosening when inflationary pressures subside.
Business and Economic Surveys - the perception of business, manufacturing and production managers on the overall health of a nation's economy tends to affect exchange rates, especially if the results of the surveys differ widely from the market consensus.
Supply and Demand of Commodities - commodities such as precious metals, grains and crude oil directly affect the prices other commodities and are closely watched by many traders. Commodity prices also play a major role in inflationary tendencies, which can affect a nation's central bank monetary policy.
National Politics - political issues in a nation can significantly influence the value of their currency. The outcome of elections and other political events often directly affect exchange rates.
Geopolitical Events - a war breaking out in an oil producing country can affect the price of crude oil, which in turn could affect world inflation. A country nationalizing a major industry could also directly affect exchange rates. Watching geopolitical events is yet another of the important fundamental analysis tools.
