Forex Trading is a common way to make money in the financial market. It involves buying and selling currency pairs with the aim of making a profit. In most cases, traders use leverage to maximize their profits.
To analyze different pairs, traders use different methods depending on their style. The news study stands out among them.
As you may have guessed, in this article we will explain the concept of fundamental analysis applied to forex trading.
What is fundamental analysis in forex?
Currency pairs are moved by a Number of factors such as news and economic data. For example, in most cases, the US dollar tends to rise sharply when the Federal Reserve decides to adopt a more hawkish tone.
In 2022, the currency jumped to the highest point in more than 20 years when the Federal Reserve decided to raise interest rates by more than 300 basis points.
Therefore, the Fundamental analysis aims to identify current macro data and news Then predict the performance of the currency. Traders look at Economic calendar To anticipate movements in the market. They also interpret the latest news to determine whether the currency will rise or fall.
Fundamental analysis vs technical analysis in forex
Fundamental analysis is different from Technical Analysis. the last one Depends on chart analysis To determine if you want to buy or sell a currency pair. It’s common many of Important Approach.
First, traders use technical indicators to Predict whether the currency pair will hold current trend or vice versa.
Second, traders focus on chart pattern analysisWhere do you look at continuation and reversal patterns? The most common chart patterns in forex are triangles, head and shoulders, and ascending wedges.
Third, there is candle patterns Which consists of one or two candles to predict the next price movement. The most popular candlestick patterns are Hammer, Doji, Harami, Evening Star, and Meteor Star among others.
Key data in forex fundamental analysis
There are many important data that traders look for when doing fundamental analysis in forex trading. Let’s delve into the most important ones, at least for us.
Employment data
Jobs are an important part of any economy. Merchants use Job numbers to determine the strength of the economy. In most cases, a well-functioning economy tends to add a large number of jobs. Therefore, forex traders look at these numbers to Determine whether the central bank will raise or lower interest rates (In short, they consider monetary policy).
Job numbers are important because they It forms part of the central bank’s dual mandate. These banks are mandated to ensure that the economy has a low unemployment rate and this adds more jobs. most watched Forex Trading Job Numbers from the United States. Traders are watching the following key data.
- Jobs added – NFP data shows the number of non-farm jobs added in the economy. Higher number is preferred.
- Unemployment rate – This figure shows the percentage of people of working age who are unemployed.
- wages Wages are an important part of the economy. In most cases, wages rise in a strong economy when people compete for talent.
- Post rate – This figure shows the percentage of workers of working age.
inflation
inflation It is another important data in fundamental analysis. sRefers to the general change in item prices in the economy. inflation It constitutes the other part of the Federal Reserve’s dual mandate In terms of the bank is required to ensure price stability.
When inflation gets out of control, as it did in 2022, The Fed tends to respond by raising interest rates. There are several measures of inflation that are closely monitored:
- Consumer Price Index (CPI) – The Consumer Price Index measures the change in the prices of most items in a country such as food, energy, and furniture. Core CPI excludes food products and volatile energy.
- Producer Price Index (PPI) – The Producer Price Index measures the change in selling prices received by domestic producers for their products.
- PCE Index (PCE) – This is the Federal Reserve’s most accurate inflation measure. It measures the prices at which people in the United States buy on their behalf.
Retail
The other important data in fundamental analysis is known as Retail. He. She Measures the volume of merchandise sold by US retailers.
It is important economic data because of the critical role that the retail sector plays in the economy. In most cases, retail sales volume Rise when the economy is in good shape.
Manufacturing and Services PMI
The manufacturing and services PMI numbers are published monthly. They provide Estimate the output of the two industries monthly basis. number Usually 50 and above is a sign that the industry is growing. On the other hand, a fall below 50 is a sign of industry growth.
There are other important data that forex traders keep an eye on in fundamental analysis, including:
- Industrial production Measures the output of major industries such as mining, agriculture, and manufacturing.
- Consumer confidence This is important data because consumer spending is the largest component of the US economy.
- housing data The most popular housing data are Home Price Index (HPI), New and Existing Home Sales, Pending Home Sales, Building Statistics and Housing Statistics.
Economic calendar in fundamental analysis
There is a common question about How do you find the latest news? and economic events in forex trading. Economic calendar is an important tool Provides schedule of upcoming economic events.
Most forex traders look at the calendar every day before they start trading. The chart below shows what the economic calendar looks like.
As you can see, the calendar contains the date, time, currency affected, implied, actual, forecast and past volatility.
How to use fundamental analysis in forex trading
Fundamental analysis is an important way to predict the direction of financial assets. but, In most casesAnd the It is ideal for traders with a medium to long-term horizon. Speculators use the economic calendar only to forecast fluctuations across major currency pairs.
In fundamental analysis (in forex), All economic data flows into central bank decisions. In most cases, strong numbers usually indicate that the central bank will start or continue to adopt a more hawkish tone. On the other hand, the weak numbers suggest more easing in an effort to boost the economy.
Summary
Fundamental analysis plays an important role in day trading. However, this varies depending on the asset we are studying: analyzing news about the stock requires different data than those interested in currencies.
This is why it is important to understand how fundamental analysis is used specifically for forex trading and how we can use this data to build strategies. We have also explained common economic data in this type of analysis.
Useful external resources
- What factors should I consider in my forex fundamental analysis? – kora