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Fundamental Forex Analysis


Why A Trader Should Know About Fundamental Economic Reports

The two primary approaches of analyzing the forex markets are fundamental analysis and technical analysis. Fundamentals focus on financial and economic theories, as well as political developments to determine forces of supply and demand.


Fundamental analysis studies the causes of market movements while technical analysis studies the effects of market movements.


Fundamental analysis deals with the underlying reasons of why the price of a currency pair will change. Fundamental analysts examine the country that is represented by a specific currency. If the economy of that country looks good, then the value of its currency is going to increase. Fundamental analysts buy currencies of economies that are doing well.


With technical analysis price moves in specific patterns. Technical analysts use these patterns to predict movement of the currencies and decide which currency pairs to buy or sell.


Fundamental analysis is a fundamental strategy of trading widely used by online traders. This strategy uses estimations which are used to predict the conditions of the economy.


The interest rates and the overall economy strength are the two key factors that are involved in fundamental analysis. The strength of the overall economy is measured using a number of macroeconomic indicators like GDP, Retail Sales, Consumer Spending, Inflation, Trade balance and Political Stability. These macroeconomic factors are referred to as economic indicators.


Interest rate is the most important factor that is involved in fundamental analysis. The interest rate of a currency directly impacts the amount of inflation that is present in a country. If interest rates are increased, the amount of inflation in the country decreases. If interest rates are lowered, inflation is increases.


Example: USA Federal Open Market Committee FOMC rate decision announcement has a huge impact on the Forex market.


Fundamental analysis by Comparing Countries

Every Forex transaction involves buying one currency and selling another. Fundamental analysis in Forex is a type of market analysis which involves studying of the economic situation of countries to trade currencies more effectively. It gives information on how the big political and economical events influence the exchange market


The Carry Trade: Fundamental analysis trading by comparing interest rates of currencies.

The carry trade is a strategy in which a trader sells a currency that is offering lower interest rates and purchases another that offers a higher interest rate. In other words, you borrow at a low rate, and then lend at a higher rate. The trader using the strategy captures the difference between the two rates. When highly leveraging the trade, even a small difference between two rates can make the trade highly profitable. Along with capturing the rate difference, investors also will often see the value of the higher interest currency rise as money flows into the higher-yielding currency, which bids up its value.



Major Economic Reports Forex Traders Should Know: a.k.a Market Movers

Some of These news reports can move the market within a range of 200 - 400 pips within minutes of their announcement, and it is best to keep a time table of when these news releases are scheduled to be announced.


US economic indicators

  • US Non Farm Payroll - Employment report of jobs created in the United States
  • Interest rates (FOMC) - Federal Open Market Committee FOMC rate decisions
  • US Gross domestic product (GDP) - a measurement of growth in economy
  • US Trade Balance - proportion between exports and imports in US economy
  • Treasury Inflow Capital (TIC) Data - a measure of how much foreign buying of a country securities takes place
  • US Retail Sales - measure of consumer expenditure
  • Consumer price index (CPI) - measure of inflation


NB: because the US dollar is involved in over 80% of all forex trades, US economic data tends to be the most important in the Forex market.



Japan economic indicators

  • Bank of Japan Monetary Policy Meeting - measures strength of the JPY
  • Trade Balance - Japanese imports versus exports
  • Gross domestic product (GDP) - growth in an economy
  • Consumer price index (CPI) - measure of inflation
  • Industrial production index - a measure of activity in the Japanese manufacturing sector
  • Retail sales - a measure of strength of consumer expenditure
  • Tankan report - assessment of Japanese business conditions
  • Unemployment rate



Great Britain economic indicators

  • GBP Trade Balance - a proportion between exports and imports
  • Gross domestic product (GDP) - growth in an economy
  • Consumer price index (CPI) - measure of inflation
  • UK Housing Prices - UK Housing Prices gauge the level of inflation in the UK .
  • Bank of England Meeting -outline of monetary policy and changes to GBP rates.
  • UK Unemployment rate
  • UK Retail Sales


Euro Zone economic indicators

  • Euro Zone Countries Trade Balance - a proportion between exports and imports
  • Euro Zone Gross domestic product (GDP) - growth in an economy
  • Euro Zone Consumer price index (CPI) - measure of inflation
  • ECB meeting -outline of monetary policy and changes to GBP rates.
  • Euro Zone Unemployment rate
  • Euro Zone Retail Sales


All these news reports can be found on economic calendar, available on various trading sites online.

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