Fundamental analysis can be defined by laying the foundation or base to form an essential component of a system and something of great importance.
Related to currency trading specifically it´s the study of underlying factors that drive currency prices.
Its meaning relates to the economy, central banks and politics.
Some of the more important questions a trader may ask is:
a) which economies in the world are growing
b) is it a healthy and sustained growth
c) how are the goverments / central banks running the economies
d) how can the political situation of that particular country be defined
The FOREX markets that we trade in prices future growth and prosperity up to six months in advance.
The daily released fundamental data is analysed continuously and interpreted in a way that may provide clues for what it may mean for the GDP and the overall health of the economy.
There are three situations that we as traders have to be aware of. Numbers of surveys released may miss, hit or exceed the consensus number.
How to go about the business of understanding the main or best information on the street is perhaps to choose the most important news releases and use them as the foundation of your thinking.
The major releases may include:
a) Non Farm Payroll – labor and market surveys
b) PMI – purchasing managers index ISM- institute of supply management
c) Quaterly GDP
d) Inflation data
NFP is released on the first week of each month by the bureau of labor statistics and measures the number of jobs created in the non farm sector.
It provides an idea about the confidence of american businesses for the future.
If a company is selling more products it will have to increase its working force to be able to meet the demand,
If on the other hand sales decrease then the company will decrease the number of its employees.
Stable jobs can also be a sign of more spending if people have confidence to keep their jobs.
Please also take note that in the US consumption makes up for 70% of the economy.
ISM surveys provide overall business sentiment in exports, new orders and various inventory levels.
If its numbers have been below 50 for a long time and then move to over 50 then there might be a change in sentiment that leads to a reversal and to a new bullish trend.
The opposite may also occur of course where you would then have the beginning of a bearish trend if the number moves below 50 after having had only positive numbers.
This number has a relationship with GDP and really may signal growth strength or weakness.
Inflation can be divided into two parts CPI consumer price index and PPI producer price index
CPI is the value for an item a consumer needs to pay more or less to buy a specific item and PPI is the change of price of a good when released from the factory.
Inflation is significant because a change in price determines the state of the economy.
If prices fall the activity is slowing down and if prices rise then you may think in therms of economic expansion.
Quatrely GDP stands for private sector consumption+gross investment+government spending+ exports-imports
It is basically the market value of all goods and services produced by a country.
If GDP numbers released are good then the economy is in good shape or growing if not then you may choose to be a bear towards that currency.
I hope that this article was helpful. What I may suggest next is that you analyse only this four factors on some currency pairs for you to have a bias.
Once this is accomplished then you trade only in direction of your bias.
Trading should be as simple as possible remember we are afraid of what we do not know or do not understand.
Once all the information is easily digested then we may take action more firmly and in a more confident manner.
I wish you like always the BEST OF PIPS.