It also reports their " capacity utilization ," the degree to which each factory's capacity is being used. It is ideal for a nation to see a production increase while being at its maximum or near-maximum capacity utilization. Traders using this indicator are usually concerned with utility production, which can be extremely volatile since the utility industry, and in turn, the trading of and demand for energy is heavily affected by changes in weather. Significant revisions between reports can be caused by weather changes, which in turn can cause volatility in the nation's currency.

The CPI measures change in the prices of consumer goods across over different categories. This report, when compared to a nation's exports, can be used to see if a country is making or losing money on its products and services. Be careful, however, to monitor the exports — it is a popular focus with many traders because the prices of exports often change relative to a currency's strength or weakness. Other major indicators include the purchasing managers index PMI , producer price index PPI , durable goods report, employment cost index ECI and housing starts.

And don't forget the many privately issued reports, the most famous of which is the Michigan Consumer Confidence Survey. All of these provide a valuable resource to traders if used properly.

Since economic indicators gauge a country's economic state, changes in the conditions reported will therefore directly affect the price and volume of a country's currency. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency's price. Third-party reports, technical factors, and many other things also can drastically affect a currency's valuation. When conducting fundamental analysis in the forex market :.

There are many economic indicators, and even more private reports, that can be used to evaluate forex fundamentals. It's important to take the time to not only look at the numbers but also understand what they mean and how they affect a nation's economy. When properly used, these indicators can be an invaluable resource for any currency trader.

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Investopedia does not include all offers available in the marketplace. Related Articles. Macroeconomics Top 10 U. Economic Indicators. Economics What Is GDP and Why Is It So Important to Economists and Investors? Partner Links. Related Terms. Economics Defined with Types, Indicators, and Systems Economics is a branch of social science focused on the production, distribution, and consumption of goods and services. So, as currencies of nations with strong fundamentals appreciate way beyond their equilibrium value, we will have another contrarian trade opportunity for shorting their currencies.

Another important part of the fundamental analysis consists ofpolitical and geopolitical events that surround a currency pair. These events can change the balance between two currencies so aggressively that it is worth keeping an eye on what their impact might be. The recent referendum in the United Kingdom offers us the perfect example of a political event that changes the way currencies are valued.

If a currency pair is in a strong uptrend or downtrend this is a summary of the two economies presented in the form of a trend. The actual trend analysis of a currency pair would take very little time, using some simpleforex trend indicators.

So by looking at the larger forex trends and time frames, you are actually conducting a forex fundamental analysis of a currency, without looking at any economic data. If the British Pound is strong against all currencies how much fundamental data do you need to know that the British economy is strong??

Similarly, by following these values the trader can form an opinion on where the interest rates will go. Once we understand the policies of global central banks, we must compare these policies with their precursors, and decide on their possible impact on the global economy. Fundamentally, if a country or currency region raises its interest rates and has strong monetary policy, the currency of that country will strengthen.

Also if a country or currency region is lowering interest rates that individual currency could be weak. One of the main reasons why I and all of my members prefer to trade primarily with technical analysis is because there are literally millions of different variables in the world that can affect financial markets at any one time.

The Brexit vote for the United Kingdom to leave the European Union had a tremendous impact on the British Pound, such that it lost in value virtually overnight. It is not only the GBP currency pairs that moved, though, as correlations influenced trading as well.

The best approach for forex traders is to do a thorough trend analysis of the entire market, or in the case of Forexearlywarning traders this would be to conduct a multiple time frame analysis for 28 pairs, by individual currency. Then a trader can incorporate forex fundamental analysis into the trend analysis.

We also know that if there is one currency with strong fundamentals and another currency with weak fundamentals we would expect a trend to eventually form between these two currencies. So in a sense, forex fundamentals are build in to our trading system because we follow the larger trends of the forex market on the larger time frames.

By always looking at the larger trends of the market, this automatically puts us in agreement with the fundamentals. So given the inverse relationship between gold and the US Dollar, currency traders can take advantage of volatility in gold prices in innovative ways. Some of them may also give traders an idea of what a future release could look like, such as preliminary GDP or survey numbers.

A financial product moves based on differences between supply and demand. Currency fundamental analysis for currencies like the New Zealand Dollar, Australian Dollar and the Canadian Dollar, or commodity based currencies, is slightly different. Therefore the strength or weakness of these currencies reflect commodity prices and interest rates.

It is therefore clear that a political event, in this case a referendum, had a major impact on the overall currency market, as the GBP rebalancing influenced the value of all currency pairs.

Bozhidar Plamenov Bozhidarov. Stephen Hoad. Several factors prove helpful in building long-term strength or weakness of the major currencies and will have a direct impact on you as a forex trader. Countries with strong economic growth will surely attract foreign investors and thereby strong currency value. If the economic growth and outlook is positive, it indicates there is low unemployment rate, which in turn means higher wages to the people.

Higher wages means people have more spending power, which in turn indicates higher consumption of goods and services. Thereby, this propels the economic growth of the country and there is an increase in the currency prices. Inversely, if the economic growth and outlook of a country is weak, it indicates the unemployment rate is high. This shows that the consumers do not have the spending power; there are not too many business setups.

The government central bank is the only entity that is spending. This leads to a decrease in the currency price. Therefore, the positive and negative economic outlook will have direct impact on the currency markets. All thanks to globalization and technological advances which have kind of provided wings to the market participant to invest or spend virtually anywhere in the world.

Capital flows means the amount of capital or money flowing in or out of a country or economy because of capital investment via purchasing or selling. We can check how many foreign investors have invested in our country by looking at the capital flow balance, which can be positive or negative.

When a country has positive capital flow balance, it indicates more people have invested in the country than investments heading out of the country. While a negative capital flow balance indicates investments leaving the country is much more than investment coming in. A higher capital flow means more foreign buyers have invested, which in turn increases the currency prices as investors want to buy your currency and sell their own.

Consider an example of USDINR currency pair - if on one particular month, capital flow is very large, directly it indicates that more foreign buyers are keen on investing in our home country. For this, they need local currency. Therefore, the demand of INR will increase and the supply of foreign currency USD or Euro will increase. The decrease in the price of USDINR depends on what the overall capital balance is.

In simple terms, if the supply is high sellers are more for a currency or demand is weak , the currency tends to lose value buyer are less. The Export and Import of goods from one country to another is a continuous process. There are exporting countries, which sell their own goods to other countries importing countries that are keen on buying the goods. Simultaneously, the exporting country becomes an importing country when it in turn buys something from another country.

The buying and selling of goods is accompanied by the exchange of currencies, which in turn changes the flow of currency, depending on how much we export value and import value. If the export bills of a country are higher than our import bills, we have trade surplus and the trade balance is positive. If the import bills of a country are higher than our export bills, we have trade deficit situation, and the trade balance is negative. Positive trade balance trade surplus comes with the prospects of pushing the currency price up compared to other currencies.

Foreign investors prefer to invest in countries where the government is stable, having stable laws for business. Any impact to an economy positive or negative will directly affect the exchange rates. Home Coding Ground Jobs Whiteboard Tools Business. Teach with us. Forex Trading - Fundamental Market Forces Advertisements. Previous Page. Next Page. More Detail. Previous Page Print Page Next Page.

However, if the trade deficit exceeds market expectations, the price of the currency can change significantly. Fundamental analysis is based on identifying macroeconomic indicators and considering their impact on exchange rates at any given time. The GDP is somewhat analogous to the gross profit margin of a publicly traded company in that they are both measures of internal growth. Facebook Instagram LinkedIn Newsletter Twitter. Bozhidar Plamenov Bozhidarov.

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