FX Fundamental Analysis
FOREX Fundamental analysis can be said to be the evaluation of macro economic indicators, political forces and asset markets and their relation to and effect on foreign exchange markets. By macro economic indicators we mean such measurements as GDP or Money Supply. Political forces could for example be perceived political stability or elections, while by asset markets we mean for example the bond market or real estate market.
The exchange of foreign currencies can be traced back to at least antique times or about 1000 BC. After World War II the US Dollar replaced the British Pound as the leading currency, due to the fact that USA was the only remaining economic power not scarred by war. By the early 1960s this was a firmly established fact. But it was not until Nixon in 1971 abandoned the US Dollar fix to gold that the modern FOREX market was born. Since then all major currencies are free-floating.
As you probably know by now, the Foreign Exchange Market is the largest in the world today, with an estimated daily turnover of US$1.9 trillion. Opposite to the commodities and equity markets, the FOREX market is not traded on an exchange, i.e there is no fixed marketplace or trading floor, sometimes called OTC (Over-The-Counter). Rather an intertwined, global network of buyers and sellers of different currencies make up the marketplace, hooked up via phone and computer. Since it is not regulated by an exchange it is a free and global 24 hour market (well, only laissez-fair capitalism would guarantee a truly free market).
The reason we have a Foreign Exchange Market include capital flows from trade, foreign investment and speculation. Foreign Exchange is an integrated part of our lives and without it, as we know it now, international trade wouldn't be possible. Otherwise, how could a Swedish car maker sell its products on the US market. The Swedish car maker (Seller) is quoting its cars in Swedish Krona (SEK) but the car importer (Buyer) is paying in US Dollar (US$). The FOREX market is providing us with a place where we can exchange the different currencies, thus facilitating trade between foreign counterparts with different base currencies.
Nowadays transactions initiated through trade or investment is very small and speculation is the major part of all currency transactions. However, do not think that the speculator (i.e you) is not a necessary part of the market. It is the speculator that provides most of the liquidity of the market, so that international trade and foreign investment can get a quick and fair quotation. In return for providing liquidity, the speculator seeks a profit.
Since the US Dollar is the major currency for international trade, a currency is generally quoted against the US Dollar. Actually over 90% of all currencies are traded against the US Dollar. Since the introduction of the EUR, it is common for major currencies to be quoted against the EUR as well. Other major currencies are the Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF) and to some extent Canadian Dollar and Australian Dollar.
Historically London has been the leading foreign exchange center of the world and this is also true today. The majority of the FOREX volume is going through London and to some extent also through the financial centers of USA, Germany and Japan.
When you go through the different economic indicators, you will notice that the ones with high impact are usually the same:
Current Accountforex fundamental analysisEvery country have a few high impact indicators that are special for that particular country, for example ZEW Survey for the Euro-zone or the Treasury International Capital (TIC) in the US. These you need to learn and understand what they mean. Keep yourself up to date on my FOREX economic calendar page for changes in market impact. Who knows, perhaps a few months from now an indicator rated moderate or low might have been promoted to high market impact.
Depending on what type of trader you are (or want to be), your interest in economic indicators vary. If you are a technical trader (using first and foremost technical analysis) then you focus on the high market impact indicators and then keep a close eye on time of release so that you don't get caught on the wrong side. If you are a news trader or a trader using mainly fundamental analysis then you need to get a deeper understanding about Fundamental Analysis and each economic indicator's market impact, which is not covered here.
Regarding the Economic Indicators, I have organized them according to Currency Pair and Market Impact as you can see below. I have tried to keep the information as concise as possible, giving you what you need to know only at a glance. It wouldn't surprise me if someone have objections regarding the way I have organized the different Economic Indicators. The thing is though that the market changes and with it the Economic Indicators it considers more important than others. A classical example are the housing indicators that when not in vogue are demoted to Low Impact and then when the market takes interest again are promoted to High Impact.
Legend
Economic Data affecting USD pairs
Economic Data affecting EUR pairs
FOREX Fundamental Analysis
Interest Rate Announcement
Gross Domestic Product (GDP)
Unemployment Rate
Consumer Price Index (CPI)
Trade Balance
Every economic indicator must be put into context, i.e not only do you need to look at the absolute and relative value of the indicator itself, but also how the indicator relates to the general consensus about the state of the economy and currency. Try to put the indicator into the big picture. Unfortunately the importance of each indicator changes over time and overall economic performance of a country as well, so the job in a way never ends.
The forces that drive the value of a currency is demand and supply. When we trade a currency we trade a currency pair, for example EURUSD. In this way we have a double effect, because two currencies are involved. If the Euro-zone economy is strong, the demand for EUR would also be strong and the EURUSD should appreciate. If we at the same time have a weak US economy then the pressure on the USD is heavy and this should further appreciate the EURUSD (in effect depreciate the USD). When you go through the economic indicators, think in terms of demand and supply. If the Euro-zone GDP is rising, what effect does that have on the EURUSD (or any other EUR pair) exchange rate?
Another thing that is important to understand is Consensus and Expectations. I have also put together some information regarding Intermarket Effects. Please read both articles, they are important.
= High Market Impact
= Moderate Market Impact
= Low Market Impact
Economic Indicators
Since the US Dollar is so dominating in world trade, data coming out from the US is extremely important. All commodities, like oil, copper, or wheat, is quoted in USD. When an importer in Europe is buying finished goods from China the goods are quoted in USD. The worlds biggest economy is the US, there is no escaping the USD and the impact economic data released from the US has on us traders.forex fundamental analysis
High Market Impact
Moderate Market Impact
Low Market Impact
Since its physical introduction in 2002, the EUR has made quite some progress, although in the very beginning it was put under pressure and received a lot of criticism. The EU is a very large common market (and expanding) and the influence of the EUR is increasing.forex fundamental analysis
High Market Impact
Moderate Market Impact
Low Market Impact
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