Fundamental Analysis – Introduction
Every day, numerous economic indicators are released by governments or private bodies that provide snap shots on the strength or weaknesses of economies. These data announcements help traders the world over trade the Forex market. A currency of a country with a healthy economy becomes a very attractive option for Forex traders. Generally, the Forex market is supportive of currencies whose interest rates are on the rise.
Any data that suggests this may be the case will automatically strengthen the currency. In order to “trade the news” successfully, a Forex trader needs to be aware of the consensus figure (what the market expects the number to come out as) as well as the actual release number. Market reaction to data is more often than not relative to the consensus expectation rather than the number itself.
Regularly, you will see a currency reacting positively to data that under normal circumstances may be seen as negative, just because the number has “beaten” the forecast. As a trader, you don’t need to know every facet of each and every data release, but you should know when the “market movers” are coming out, and what they are. In the following pages you’ll receive an explanation of some of the most important economic data received. Click here to access our data calendar.
Employment
Importance: 4/5
Release: Monthly Employment reports are viewed as a central measure to the strength and weakness of an economy. Although the US NFP (link) data is unique in its ability to move the market, employment and unemployment reports are a clear guide as to whether an economy is in a healthy state or is being dragged into a recession. As a result they have a major affect on currency movements.
Retail Sales
Importance: 4/5
Release: Monthly Retail sales is one of the most important gauges of any economy as it represents a monthly look at how people are spending money at retail outlets. It gives an excellent insight into where an economy is headed. If retail sales are strong it’s a good sign that the economy is headed in the right direction. The higher the number the better it is for the economy and that should strengthen the currency. As such, this data is a big market mover.
International trade
Importance: 3/5
Release: Monthly The International Trade data measures the difference between a country’s exports and imports. An economy always wants its exports to outnumber imports – the more it is exporting, the more the economy is stimulated. A negative trade balance (where imports are larger than exports) has a negative affect on a currency – none more so than on the US dollar, as it creates more demand for a foreign currency.
Inflation Data
Inflation data is made up of the Consumer (or Retail) Price Index and the Production Price Index. When central banks make their interest rate decisions, inflation is normally the central variant on interest rate decisions.
Consumer Price Index (CPI)
Importance: 4/5
Release: Monthly CPI data reflects the average price of a fixed basket of goods and services bought by the retail consumer. Inflation is measured by the monthly change in this price. Although low inflation is seen as important for an economy, ironically, a higher number is often a positive for a currency as it suggests interest rates may have to rise in order to curb the inflation. Central banks tend to take more notice of “core” CPI – a figure that does not include food and energy that are both volatile numbers sensitive to various external influences.
Producer Price Index (PPI)
Importance: 3/5
Release: Monthly PPI is reflects the average price of a fixed basket of goods and services bought by the producer. In certain respects, the PPI report is an indication of future CPI. If the producer’s prices have gone up, it is fair to assume they will pass that increase onto the consumer. PPI is much less of a market mover than CPI. “Core” PPI without the sensitive food and energy components is also reported.
Industrial Production
Importance: 2/5
Release: Monthly Industrial production measures the manufacturing output of a country’s factories, mines and energy sector. In leading countries this figure represents a significant percentage of its total GDP and so gives a good idea of the overall strength of the country. The higher the number, the better for the economy
Consumer Sentiment
Importance: 3/5
Release: Monthly Consumer sentiment is a very important factor in any economy as it affects the investment and spending behavior of the person on the street. If a person feels confident about their job and their prospects, they will spend more money and save less. This gives a boost to the economy. The higher the number, the better for the economy.
Business Sentiment
Importance: 3/5
Release: Monthly If a business manager feels positive about the economy and its own future, it will expand with confidence. This means more jobs, and more investment in the economy. Both give a boost. The higher the number, the better for the economy.
Gross Domestic Product (GDP)
Importance: 3/5
Release: Monthly GDP is the all-inclusive measure of the health of an economy. A high GDP figure suggests a healthy economy. It gives important information about every sector of the economy. Generally GDP comes out as a preliminary figure and is revised later in the month or in the next month. Although much of the data is already known before the release from previous announcements, GDP has the ability to sometimes move the market.
