To trade Forex using Fundamental Analysis, a trader must pay close attention to many different indicators. Economic news is what allows a trader to use Fundamental Analysis. Inflation rate changes, interest rate fluctuation and, unemployment reports are all used to predict movement in the Forex market, making it possible to use them in your trading strategy. This is the most basic explanation of trading using fundamental analysis.
It is not enough to follow the news as it comes out. A trader who is using Fundamental Analysis needs to know when the news is about to break, what it is expected to say and how that will affect the Forex market and the exchange rate of the currency he or she holds. There are calendars available that will help a trader make themselves aware of when this information will become available.
The central bank of any country whose currency you are trading is a very significant piece of the Fundamental Analysis puzzle. The central banks determine the interest rates which they charge the commercial banks and that affects the amount the banks will charge and pay their customers. To stimulate the economy, the central bank can lower the interest rates that they charge the local banks and the local banks will then lower the price for borrowing money. Conversely, to limit inflation, the central bank can raise the interest rate they are charging slowing down the economic activity in the nation.
Supply and demand of the currency is also in the hands of the central banks, which in turn greatly affects the value of that country’s currency. The central bank can hold on to currency in reserve or release their reserves therefore changing the value of the currency. Watching the moves of the central bank of the country whose currency you are trading is key to any trading strategy that uses Fundamental Analysis.
Important economic factors which will be essential to Forex traders using Fundamental Analysis are the ones related to how the economy is functioning. The GNP or gross national product is is used to measure economic growth and inflation. Inflation happens when the growth is happening too quickly. This devalues the currency. Slow but steady economic growth strengthens the currency.
The Consumer Price Index, CPI is a good measure of how strong or weak a type of currency is. This indicates how much a consumer can buy for his money. A trader can watch these changes and predict whether the trading value of a currency will be stronger or weaker. The Producer Price Index or PPI also determines the value of currency because what the producers are paying to make something will have a strong effect on what they will charge the consumer. When PPI goes up, so does CPI.
Unemployment reports will help a trader see where the economy is going because obviously the unemployed spend less money. The spending levels of a country are a determining factor in the value of its currency. All of these factors together help traders form a strategy for trading using fundamental analysis.