As you know, market movements forecasting is based on two types of analysis: technical and fundamental.
We have already explored the methods of technical analysis in course of our preceding lectures; now it is time for fundamental analysis.
So, let’s get started. Only few economic factors can influence currency exchange rates. The rest of indicators are mainly used by economists or other markets. These factors confirm to some degree a possible or existing trend in the economy, which does not have a direct impact on the forex market. Therefore, such factors are just absorbed by usual market fluctuations. Fundamental analysis is a way to assess both economic growth in separate countries and the global economic situation, including their mutual influence, allowing for numerous economic indicators and factors. Some deciding events happen accidentally, others are published on a set schedule by government, non-government scientific research organizations.
Any kind of information that contributes to the economic well-being belongs to fundamental data.
It can be divided into four major groups, including economic factors, financial factors, political events, and periods of crisis.
Economic factors (indicators) are set apart from others as their release date is usually known in advance in most industrialized countries.
Political events represent various influences on the global market. Thus, president election can hardly reverse the market course, while a sudden change of a government system has every chance to shock market participants.
Financial factors can be referred to the group of events that are hard to be predicted. These factors have a considerable impact on the forex market. Changes in key rates of the world’s leading central banks, such as the US regulator, are an obvious example. No one could clearly foresee monetary policy reforms. There are only expectations available, which in their turn crucially influence the market. Usually, investors begin to express concern about one week before another US Fed’s meeting. The tension becomes almost unbearable in case of a sudden rate change that results in sharp fluctuations in the currency exchange rate.
Crisis can also play a role of a deciding factor in global markets. An impact it makes depends on the degree of predictability. For example, the Persian Gulf Crisis produced a modest effect on Forex. However, sometimes a simple hint dropped by a senior official can cause huge volatility in the currency exchange market. Thus, UK Prime Minister Tony Blair sparked an immediate response from the market delivering the speech on adopting the euro as the currency to replace the British pound in 2001.
Fundamental analysis cannot be performed without economic indicators as they represent its instrumental part.
As a rule, fundamental releases are scheduled in advance. In the US, economic indicators come in on a monthly basis except for the Gross Domestic Product (GDP) and the Gross Domestic Product Deflator (GDPD), which are published once in a quarter.
Meanwhile, weekly indicators do not make any significant impact on the market so they are not worth considering.
Traders should be kept informed of every date when a particular economic report is due to be released. Especially since it is unlikely to cause any problem as all the relevant information on releases and analysis of their potential impact on the market can be found in news feeds from brokerage companies, which provide traders with services for trading online.
Besides, over ten other online sources deliver such data.
The US economy has the greatest influence on the forex market as it contributes 20.6% to the global GDP growth rate. To prove this fact, let’s explore the US economic indicators drawing an analogy with indicators of other countries according to their impact on the global economic health. As a rule an economic indicator is comprised of two parts. The first one is its reading in the last month, and the second – revised data for the preceding period.
The Gross National Product (GNP) is one of the major economic indicators. The formula for calculating the GNP is:
GNP = C + I + G + T
С is the consumption spending which depends on an amount of personal earnings and consumers’ estimates of their prospects in the future. In other words, this is a psychological factor that determines consumers’ decision whether to spend or save money;
I is for capital investments;
G is for government spendings. This data strongly influence other economic indicators and the whole economic situation in the country;
T is a trade balance (difference between exports and imports).
The GNP report comes out once a quarter measuring the sum of all goods and services produced by the United States residents, either within the country or abroad, for the reporting period. When the GNP readings top analysts’ forecast, the US dollar strengthens against the most majors and vice versa.
The Gross Domestic Product (GDP) efers to the sum of all goods and services produced in the United States, either by domestic or foreign companies. The difference between the GDP and GNP is nominal in the case of the United States economy. However, this economic indicator is more popular outside the United States rather than within the country. In the US it is mainly published in order to make it easier to compare the performances of different economies.
Inflation Indicators are indicators which detect trends in prices of consumer goods and services. These indicators are closely monitored by market participants.
Raising the interest rate is the method of choice for central banks to control the inflation growth rate, and higher interest rates tend to support the local currency. The inflation rate limits the key interest to its objective level that, coupled with real GDP/GNP figures, helps traders and fund managers compare economic conditions in different countries and find the best opportunities for making profits.
Producer Price Index (PPI) has been published since the early twentieth century. The indicator measures the average change in wholesale prices for raw materials and parts at all stages.
The indicator is calculated on a basis of reports from all of the physical goods-producing industries, including manufacturing sectors, raw materials extraction, and agriculture. It covers near 3,400 materials and goods produced in the territory of the US. The most major groups include food – 24%, fuel — 7%, auto — 7%, and clothing — 6%. The indicator is monthly released.
Consumer Price Index (CPI) measures an average change in prices for items in a basket of consumer goods and services weighted according to their importance.
The most important categories in the consumer price index are food — 19% of the total weight, housing — 38%, fuels — 8%, automobiles — 7%. Besides, the index includes transport costs, healthcare, and closing. Import goods are also measured by the indicator. The release comes in once a month. Both the PPI and CPI are used to assess the inflation growth rate in the country.
Commodity Research Bureau Futures Index (CRB Index) is comprised of the equally weighted futures prices of 21 commodities, including precious metals (gold, silver, platinum), industrials (crude, gasoline, heating oil, lumber, copper, cotton), grains (corn, wheat, soybeans, soy meal, soy oil), livestock and meat (cattle, pork bellies), imports (coffee, cocoa, sugar), miscellaneous (orange juice).
Thus, 13 of 21 commodities belong to food, which makes the indicator less reliable in terms of general inflation. However, the indicator is recently gaining in popularity among professional traders.
The” Journal of Commerce” Industrial Price Index (JoC). The indicator consists of the prices of 18 industrial materials and supplies processed in the initial stages of manufacturing, construction, and energy production. It is one of the most sensitive indices as it was designed to signal changes in inflation at the initial stage. Other inflation indicators detect the same changes later.
Balance-of-Payments measures the total number of economic transactions of a certain country with the rest of the world.
Analysts assess the value of this indicator according to country’s long-term prospects of economic performance allowing for natural resources, industrial base, the level of professional training in the labor market, and labor costs. The indicator is rarely used by intraday traders.
Merchandise Trade Balance consists of the net difference between the exports and imports of a certain economy.
It’s one of the most important economic indicators. The data cover six categories, including food, raw materials and industrial supplies, consumer goods, autos, capital goods, and other merchandise.
A significant difference between the indicator readings and analysts’ forecast puts the US dollar under pressure. In case of wider-than-expected deficit, the US national currency loses against the most majors and vice versa.
The USA-Japan Merchandise Trade Balance — is a separate indicator that belongs to this group. It shows the balance of trade between the US and Japan. The greenback, as a rule, declines on the back of growing deficit in the US-Japan trade balance.
We have already explored the methods of technical analysis in course of our preceding lectures; now it is time for fundamental analysis.
So, let’s get started. Only few economic factors can influence currency exchange rates. The rest of indicators are mainly used by economists or other markets. These factors confirm to some degree a possible or existing trend in the economy, which does not have a direct impact on the forex market. Therefore, such factors are just absorbed by usual market fluctuations. Fundamental analysis is a way to assess both economic growth in separate countries and the global economic situation, including their mutual influence, allowing for numerous economic indicators and factors. Some deciding events happen accidentally, others are published on a set schedule by government, non-government scientific research organizations.
Any kind of information that contributes to the economic well-being belongs to fundamental data.
It can be divided into four major groups, including economic factors, financial factors, political events, and periods of crisis.
Economic factors (indicators) are set apart from others as their release date is usually known in advance in most industrialized countries.
Political events represent various influences on the global market. Thus, president election can hardly reverse the market course, while a sudden change of a government system has every chance to shock market participants.
Financial factors can be referred to the group of events that are hard to be predicted. These factors have a considerable impact on the forex market. Changes in key rates of the world’s leading central banks, such as the US regulator, are an obvious example. No one could clearly foresee monetary policy reforms. There are only expectations available, which in their turn crucially influence the market. Usually, investors begin to express concern about one week before another US Fed’s meeting. The tension becomes almost unbearable in case of a sudden rate change that results in sharp fluctuations in the currency exchange rate.
Crisis can also play a role of a deciding factor in global markets. An impact it makes depends on the degree of predictability. For example, the Persian Gulf Crisis produced a modest effect on Forex. However, sometimes a simple hint dropped by a senior official can cause huge volatility in the currency exchange market. Thus, UK Prime Minister Tony Blair sparked an immediate response from the market delivering the speech on adopting the euro as the currency to replace the British pound in 2001.
Fundamental analysis cannot be performed without economic indicators as they represent its instrumental part.
As a rule, fundamental releases are scheduled in advance. In the US, economic indicators come in on a monthly basis except for the Gross Domestic Product (GDP) and the Gross Domestic Product Deflator (GDPD), which are published once in a quarter.
Meanwhile, weekly indicators do not make any significant impact on the market so they are not worth considering.
Traders should be kept informed of every date when a particular economic report is due to be released. Especially since it is unlikely to cause any problem as all the relevant information on releases and analysis of their potential impact on the market can be found in news feeds from brokerage companies, which provide traders with services for trading online.
Besides, over ten other online sources deliver such data.
The US economy has the greatest influence on the forex market as it contributes 20.6% to the global GDP growth rate. To prove this fact, let’s explore the US economic indicators drawing an analogy with indicators of other countries according to their impact on the global economic health. As a rule an economic indicator is comprised of two parts. The first one is its reading in the last month, and the second – revised data for the preceding period.
The Gross National Product (GNP) is one of the major economic indicators. The formula for calculating the GNP is:
GNP = C + I + G + T
С is the consumption spending which depends on an amount of personal earnings and consumers’ estimates of their prospects in the future. In other words, this is a psychological factor that determines consumers’ decision whether to spend or save money;
I is for capital investments;
G is for government spendings. This data strongly influence other economic indicators and the whole economic situation in the country;
T is a trade balance (difference between exports and imports).
The GNP report comes out once a quarter measuring the sum of all goods and services produced by the United States residents, either within the country or abroad, for the reporting period. When the GNP readings top analysts’ forecast, the US dollar strengthens against the most majors and vice versa.
The Gross Domestic Product (GDP) efers to the sum of all goods and services produced in the United States, either by domestic or foreign companies. The difference between the GDP and GNP is nominal in the case of the United States economy. However, this economic indicator is more popular outside the United States rather than within the country. In the US it is mainly published in order to make it easier to compare the performances of different economies.
Inflation Indicators are indicators which detect trends in prices of consumer goods and services. These indicators are closely monitored by market participants.
Raising the interest rate is the method of choice for central banks to control the inflation growth rate, and higher interest rates tend to support the local currency. The inflation rate limits the key interest to its objective level that, coupled with real GDP/GNP figures, helps traders and fund managers compare economic conditions in different countries and find the best opportunities for making profits.
Producer Price Index (PPI) has been published since the early twentieth century. The indicator measures the average change in wholesale prices for raw materials and parts at all stages.
The indicator is calculated on a basis of reports from all of the physical goods-producing industries, including manufacturing sectors, raw materials extraction, and agriculture. It covers near 3,400 materials and goods produced in the territory of the US. The most major groups include food – 24%, fuel — 7%, auto — 7%, and clothing — 6%. The indicator is monthly released.
Consumer Price Index (CPI) measures an average change in prices for items in a basket of consumer goods and services weighted according to their importance.
The most important categories in the consumer price index are food — 19% of the total weight, housing — 38%, fuels — 8%, automobiles — 7%. Besides, the index includes transport costs, healthcare, and closing. Import goods are also measured by the indicator. The release comes in once a month. Both the PPI and CPI are used to assess the inflation growth rate in the country.
Commodity Research Bureau Futures Index (CRB Index) is comprised of the equally weighted futures prices of 21 commodities, including precious metals (gold, silver, platinum), industrials (crude, gasoline, heating oil, lumber, copper, cotton), grains (corn, wheat, soybeans, soy meal, soy oil), livestock and meat (cattle, pork bellies), imports (coffee, cocoa, sugar), miscellaneous (orange juice).
Thus, 13 of 21 commodities belong to food, which makes the indicator less reliable in terms of general inflation. However, the indicator is recently gaining in popularity among professional traders.
The” Journal of Commerce” Industrial Price Index (JoC). The indicator consists of the prices of 18 industrial materials and supplies processed in the initial stages of manufacturing, construction, and energy production. It is one of the most sensitive indices as it was designed to signal changes in inflation at the initial stage. Other inflation indicators detect the same changes later.
Balance-of-Payments measures the total number of economic transactions of a certain country with the rest of the world.
Analysts assess the value of this indicator according to country’s long-term prospects of economic performance allowing for natural resources, industrial base, the level of professional training in the labor market, and labor costs. The indicator is rarely used by intraday traders.
Merchandise Trade Balance consists of the net difference between the exports and imports of a certain economy.
It’s one of the most important economic indicators. The data cover six categories, including food, raw materials and industrial supplies, consumer goods, autos, capital goods, and other merchandise.
A significant difference between the indicator readings and analysts’ forecast puts the US dollar under pressure. In case of wider-than-expected deficit, the US national currency loses against the most majors and vice versa.
The USA-Japan Merchandise Trade Balance — is a separate indicator that belongs to this group. It shows the balance of trade between the US and Japan. The greenback, as a rule, declines on the back of growing deficit in the US-Japan trade balance.
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