August 22, 2017 7:00am EST
By Newsmovesmarketsforex Staff Writer
Forex traders can only make good Forex trade deals in forex market if they are able to accurately determine market trends. Fundamental analysis is used by successful Forex traders to decipher statistical data concerning the Forex market. Important parameters, like the prevailing interest rates, employment figures, and various types of economic indicators, are involved in a properly conducted fundamental analysis of the Forex market conditions.
In order to be a successful Forex trader, one must carefully observe economic indicators which influence the price of a particular currency pair. Experienced Forex traders eagerly await the release of information pertaining to such indicators and perform a fundamental analysis to determine their impact on the prices of various currency pairs.
What Is Fundamental Analysis Used For?
Fundamental analysis is the most effective way of gauging how financial markets will behave to various news releases related to the health of a country’s economy. If the analysis is done properly, it can be very helpful in forecasting the prices of various currency pairs. Although the price of a particular currency may differ from its actual value in the short-term, its prices will always stabilize at its real value in the long run.
A trader performs a fundamental analysis to correctly determine the real value of a currency pair and use the information to make a beneficial trade deal when the opportunity is right.
Fundamental analysis differs from technical analysis because the existing price of a currency pair is not what it mostly focuses on. Instead, it has a broad scope that takes into account numerous economic indicators. This makes it an excellent tool for long-term price action forecasting. However, for short-term forecasting, traders usually prefer to use technical analysis instead.
What are the Keys to Fundamental Analysis In Forex Trade?
Forex fundamental analysis is not just a simple comparison of an economic indicator with its previous reported values. It is based on a wide range of economic theories which seek to compare various sets of economic data in an appropriate way.
The concept of parity sits at the heart of a fundamental analysis of the Forex market. This concept represents a certain price at which a currency ought to be traded based on various economic aspects of a country’s macroeconomic health.
Major Economic Indicators That Are Involved In Forex Fundamental Analysis
Some of the important macroeconomic indicators used in Forex fundamental analysis are elaborated below:
- Interest Rates
Definition: Interest rate is the amount charged by the central banks of a country on the loans given by it to the private banks. It is expressed as a certain percentage of the borrowed amount.
A country’s interest rate is usually set by its central bank. It is also commonly referred to as the nominal or base interest rate. By controlling the interest rate, the government can manipulate the country’s economy. A low interest rate generally promotes economic activity within a country and leads to an increase in its GDP growth rate. However, in the long run, low interest rates can over-inflate the country’s economy and create an economic bubble because of the excess cash in circulation.
Interest rates also affect several other economic indicators, like inflation rates and trade figures. A wise Forex trader pays close attention to changes in the interest rates so that they can take advantage of good Forex trading opportunities when the time is right.
- Inflation Rate
Definition: The inflation rate is a measure of how rapidly the prices of goods and services in a country are rising or falling. A negative inflation rate is also called deflation and it represents a downward trend in the overall prices of goods and services over a certain period.
The inflation monthly or quarterly inflation figures are also important input parameters for a Forex fundamental analysis. For this reason, inflation rates are closely monitored by Forex traders. A healthy inflation rate is usually desirable because it indicates that the country’s economy is expanding.
On the other hand, deflation increases the value of money and makes goods and services easier to purchase. However, a prolonged deflation period can prove to be harmful for the economic interests of a country.
- GDP Growth Rate
Definition: The GDP (Gross Domestic Product) growth rate is a measure of the pace at which the total economic output of a nation is growing. It is calculated by comparing the value of a country’s GDP during a certain quarter to its value during the previous quarter.
The overall health of a country’s economy is usually determined by its GDP growth rate. A strong GDP growth rates indicates that the economy of the country is expanding. The price of a country’s currency usually increases when its GDP growth rates is positive.
Forex traders usually consider the GDP growth rate estimates of a country to decide whether to invest in its currency. A good estimate signals that its currency’s value will most likely rise and this encourages Forex traders to purchase that country’s currency.
News Moves Markets Forex is a reliable provider of information related to the Forex market. We have real time updates about the latest currency rates and emerging market trends. Our website also has detailed information for novice traders to help them better understand how the Forex market works.