Forex Fundamental Analysis

Mar 2, 2022

Hello!
Today I want to talk about a topic that is rarely discussed, but important at the same time - fundamental analysis of the forex market.
News, GDP, interest rates - all this affects the market and everyone needs to be able to understand this.

What is fundamental analysis
Forex fundamental analysis is a way of analyzing a currency, making predictions based on data that is not directly related to price charts.

There are two types of influence of fundamental indicators on the price:
Short term. Fundamental information has an impact on the market within minutes or hours.
Long term. Fundamental factors, the impact of which on currencies lasts from 3-6 months. Used for strategic positions.

Several basic levels are used for conducting FA.
The level of the national economy. Comprehensive analytics of economic and political indicators of the country.
Industry. The volumes of supply and demand, prices, technologies, as well as production parameters are studied.
Individual currency level. Financial statements, management technologies, business strategies, competitive environment are assessed.

The classical scheme of fundamental analysis looks like this:
An analysis of global financial markets, the presence of signs of a crisis and force majeure events, an examination of the situation in the economy and politics of the leading world powers is carried out.
Economic indicators and the general level of stability of the region (industry), the analyzed currency or other instrument are assessed.
The degree of influence of regional and world economic indicators on the dynamics of the selected financial instrument in the short and medium term is determined.

Main fundamental factors
When using FA directly to open trading positions, the following points will be decisive (in descending order of importance):
Interest rates of central banks (CB).
Macroeconomic indicators.
Force majeure situations, market rumors, news.
Central bank rates
According to the theory of macroeconomics, increasing interest rates cause currencies to rise in price, while falling interest rates make them cheaper. However, there are situations in the Forex market in which a decrease in the rate becomes the reason for the strengthening of the currency.

Foreign exchange market interventions
Currency interventions are an important tool in the analysis. Central Banks resort to such a measure very rarely, but you should not ignore this phenomenon.

Macroeconomic indicators
For any country without exception, there are data of constant importance:
the level of GDP;
inflation rate;
trade balance.
These reports are expected by the market. The approach of their publication dates gives rise to a lot of rumors that fuel the trading frenzy. Such an environment often creates situations in which the release of specific numbers does not cause almost any reaction, since the market has already beaten them in advance. However, as FA practice shows, this happens only when the existing trend is not subject to change. In the case when the published data differ significantly from the forecast, the market response can be very violent. This is especially true of the moment of the general reversal of the current trend.

Important macroeconomic indicators
In simple words, a macroeconomic indicator is expected news, showing up-to-date data on the main indices of the financial and economic state of the state.
The advantage is that each trader can know in advance the moment of release of any data from the economic calendar.
These indicators affect the rate in the short term and are suitable for trading on medium and short term timeframes.

Types of macroeconomic indicators
Trade balance. This indicator reflects the volume of exported goods to imported ones. A positive balance is called when exports are higher than imports. Assumes a strengthening of the exchange rate, due to the fact that rising exports increase the demand for the national currency of the exporting region.
Discount rate of the National Bank. On its basis, interest rates on deposits and loans are formed. When the national bank rate rises, the currency strengthens; when it falls, it weakens.
Gross domestic product. The volume of GDP is obtained by summing up the entire range of services and goods that were produced in the country per capita. However, an increase in GDP always leads to the strengthening of the national currency against other currencies.
Inflation. The growth of this indicator leads to the depreciation of the national currency.
Unemployment Rate. As a rule, an increase in the indicator is followed by a decrease in output, an increase in inflation and a negative change in the trade balance. For this reason, the data on unemployment has a strong pressure on currencies, and an increase in the figure causes a depreciation.

Macroeconomic indicators
One of the most common mistakes in trading is trying to trade on weak news. Therefore, you need to understand which data pertains to you.
Macroeconomic indicators
One of the most common mistakes in trading is trying to trade on weak news. Therefore, you need to understand which of the data are important.

Important market data includes:
money supply;
balance of payments deficit (Balance of Payment Deficit);
trade balance deficit (Balance of Trade Deficit);
unemployment rate (Unemployment Rate);
a significant fall or rise in the rate of inflation (Rate of Inflation);
fluctuations in the volume of GDP;
change in key rates;
emergencies (natural disasters, unexpected events in politics or

Second stage of analysis
An assessment of the numbers predicted in the calendar for future data.
Analysis of the market reaction to this event. This is done in order to understand the price behavior at the news release. For example, when the exchange rate of a currency dependent on news is growing steadily even before the release of figures and at the same time positive data is predicted, one should not expect sharp fluctuations in the exchange rate at the time of the release of the information. And if the forecast turns out to be wrong, then the market can react with a powerful reversal of the current trend.
Decision-making. There are two options for entering a trade. The first is to use the situation to open an order on the current trend before the release of the news with constant trailing stops to protect the position. The second is to wait for the release of the data and make trading decisions according to the situation.

Results
Fundamental indicators certainly affect the price, but each in its own way.
It is worth remembering this and not running to open a position just by seeing some news.
Analyze, try to understand the possible reaction of the market to the news.
Use all the information, be objective and then you will be better than most.
Good luck!

Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I will be glad 👩