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Fundamental analysis deals with how economic, political and social factors affect demand and supply of a currency pairs. Economic indicators are often used to analyze changes in the forex market by monitoring figures, such as interest rates, unemployment rates, gross domestic product (GDP), housing starts, consumer price index (CPI), producer price index, purchasing managers index (PMI), and other types of economic data that comes out of a country. For example, a trader conducting a fundamental analysis on EURUSD currency pair would find information on the economic data in the Euro zones such as: France, Germany, Spain, Italy and others more useful than those in the US. Why? Because the base currency is the focal point in fundamental analysis. The quote currency also plays a roll, but a little proportion of about 30% of the quote currency.
For a trader to be on top of his game, he has to understand how significant news release coming out of each Euro zone countries affects the economic state of the country. Why? Because, fundamental analysis is about looking at the intrinsic value of an investment, and its application in forex entails looking at the economic conditions that affect the valuation of a nation's currency.
Economic Indicators
Economic indicators are reports released by the government or a private organization that details a country's economic performance. Economic reports are the means by which a country's economic health is directly measured. But, there are many factors and policies that affects the economic performance of a nation. These reports are released at scheduled times, providing the market with an indication of whether a nation's economy has improved or declined. In forex and the stock market, any deviation from the norm can cause large price and volume movements. Some economic indicators are stronger than others. However, each indicator serves a particular purpose and can be useful to predict forex signal.
For a trader to be on top of his game, he has to understand how significant news release coming out of each Euro zone countries affects the economic state of the country. Why? Because, fundamental analysis is about looking at the intrinsic value of an investment, and its application in forex entails looking at the economic conditions that affect the valuation of a nation's currency.
Economic Indicators
Economic indicators are reports released by the government or a private organization that details a country's economic performance. Economic reports are the means by which a country's economic health is directly measured. But, there are many factors and policies that affects the economic performance of a nation. These reports are released at scheduled times, providing the market with an indication of whether a nation's economy has improved or declined. In forex and the stock market, any deviation from the norm can cause large price and volume movements. Some economic indicators are stronger than others. However, each indicator serves a particular purpose and can be useful to predict forex signal.
Gross Domestic Product (GDP)
GDP is one of the factors that measures a country's economy. It represents the total market value of all goods and services produced in a country during a given year. Since GDP figure is a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures. Significant revisions between these reports can cause considerable volatility.
GDP is one of the factors that measures a country's economy. It represents the total market value of all goods and services produced in a country during a given year. Since GDP figure is a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures. Significant revisions between these reports can cause considerable volatility.
Consumer Price Index (CPI)
A consumer price index (CPI) measures changes in the cost of goods and services paid by consumers in a specific month. It essentially compares the cost of living over time and can be used to gauge inflation levels. Market participants pay close attention to CPI figures for signs of inflation, because, rising inflation can cause higher interest rates and reduces borrowing. While deflation can lower interest rates and encourages lending. CPI is both leading and lagging indicators of inflation and is one of the major economic indicators used for fundamental analysis.
Producer Price Index
PPI is usually the first inflation data released in a month, so, it is the first insight investors get. The producer price index tracks price changes in goods and non-goods producing sectors. It measures changes in the selling price for finished goods, intermediate goods and crude goods across thousands of companies. The PPI is considered a great tool for looking at how prices change over long term. They are often seen as a leading indicator for inflation.
Unemployment Rate
The unemployment rate is the percentage of the labor force without a job. It is a lagging indicator, meaning that, it rises or falls in the wake of changing economic conditions. When the economy is in poor shape and jobs are scarce, the unemployment rate will increase. When the economy grows at a healthy rate and jobs are available, unemployment rate will fall.
The U.S. unemployment rate is released on the first Friday of every month with a few exceptions for the preceding month.
Interest Rate
Interest rates are the percentage charged on loans or paid to the owners of savings accounts. The interest rate is set by a country’s central bank and is then trickled down to commercial banks and consumers. Interest rates are increased to curb inflation and lowered to promote growth. Interest rates are one of the most influential factors for forex markets, due to the impact they have on the value of currencies. Higher interest rates indicate a strong economy, which make investors more likely to buy a currency, therefore increasing the value of a currency. Interest rates are both leading and lagging economic indicator. However, once the decision to change an interest rate has been made, it becomes a leading indicator for the next period of economic activity. And once it is released, it becomes a lagging indicator.
Interest rates are the percentage charged on loans or paid to the owners of savings accounts. The interest rate is set by a country’s central bank and is then trickled down to commercial banks and consumers. Interest rates are increased to curb inflation and lowered to promote growth. Interest rates are one of the most influential factors for forex markets, due to the impact they have on the value of currencies. Higher interest rates indicate a strong economy, which make investors more likely to buy a currency, therefore increasing the value of a currency. Interest rates are both leading and lagging economic indicator. However, once the decision to change an interest rate has been made, it becomes a leading indicator for the next period of economic activity. And once it is released, it becomes a lagging indicator.
HOW TO READ ECONOMIC INDICATORS
Figures, such as interest rates, unemployment rates, gross domestic product (GDP), housing starts, consumer price index (CPI), producer price index, interest rate purchasing managers index (PMI), and other types of economic data are the economic indicators the forex market used to predict signals of an asset. The indicators rely on the previous data, actual and forecast data, which an analyst or trader look at in order to predict the nature of the market. The state of the economic indicators determines the forex signal. Negative or poor economic indicator attract sell signal while positive and good economy attracts buy signal.
Economic indicators are divided into three category viz:
- Leading indicators
- Coincident indicators
- Lagging indicators
Forex analyst don’t rely on one of the economic indicators alone, they combine both the leading, coincident and lagging indicators to predict the nature of the market. They look at the previous figures, forecast and actual figures of these indicators for proper fundamental analysis and good result deliverability.
Leading indicators
They are used to predict future movements and trends of an economy. These figures change before the economy does, which can be helpful for identifying opportunities but risky, as they’re not 100% accurate.
They are used to predict future movements and trends of an economy. These figures change before the economy does, which can be helpful for identifying opportunities but risky, as they’re not 100% accurate.
Examples of leading indicators
- Interest rates
- Housing starts
- Purchasing manager index
- Consumer price index
- Producer Price Index
Coincident indicators
A coicident indicator is a metric that shows the occurring state of the economic activity within a particular area. Coincident indicators do not necessarily reflect the economy’s current condition, because, they usually involve some data collection, as a result of that they report lag. However, they are important because they show economists and policy maker’s recent and past state of the economy.
A coicident indicator is a metric that shows the occurring state of the economic activity within a particular area. Coincident indicators do not necessarily reflect the economy’s current condition, because, they usually involve some data collection, as a result of that they report lag. However, they are important because they show economists and policy maker’s recent and past state of the economy.
Examples of Coincident indicators
- Gross domestic product
- Unemployment rates
- Nonfarm payroll employment
- average weekly hours worked in manufacturing
Lagging indicators
This indicators trail the economy and are released after economic activity occurs. These aren’t necessarily useful for identifying trading opportunities, but provide essential insights into the health statues of the economy.
Examples of lagging indicators
- Interest rates
- Gross Domestic Product
- Retail Sales
- Consumer price index
- Unemployment rate
How to Use Economic Indicators
Since economic indicators gauge a country's economic state, changes in the reported condition will therefore, directly affect the price and volume of a country's currency. It is important to keep in mind, that the indicators discussed earlier are not the only things that affect 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:
- Keep an economic calendar on hand that lists the indicators and when they are due to be released. Also, keep an eye on the future; because, some markets will move in anticipation of a certain indicator or report that will be released at a later time.
- Be informed about the economic indicators that are capturing most of the market's attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most-watched indicators.
- Know the market expectations for the data, and then pay attention to whether the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results. If so, be aware of the possible justifications for this difference.
- Don't react too quickly to the news. Often time’s figures are released and then, revised immediately, therefore changing the direction of the signal. Pay attention to these revisions, as they may be a useful tool for seeing the trends and reacting more accurately to future reports.
How Economic Indicators Work with Actual Data, Forecast and Previous Data
For economic indicators to actualize it aim, the actual data, forecast and previous data of the economic indicators must be known. Since the economic indicators falls under three categories: leading, coincident and lagging indicators; the data of the major indicators among the three categories will observed and taken into consideration. Once the figures are known through broadcast from banks, Hedge funds, forex analyst and other financial institute; comparison are being made among the actual, forecast and previous data by a trader in order to know the market signal.
Previous Data
Is the last actual value or figure of the released news.
Is the last actual value or figure of the released news.
Forecast Data
Is an assumption made by the economists and forex analysts about the value or figure before the time of the released news.
Actual Data
Is the real value or figure reported at the time the news was released.
Note:
After an economic news are released, if the forecast figures are higher than the actual figures, the price of an asset will fall. But, if the actual figures are higher than the forecast values the price of an asset will rise. If forecast values and the actual values are equal, then there will be a sideways movement such movement in forex is called ranging. If the previous figures are higher than the actual figures, the price of an asset will fall. But, if the actual figures are higher than the forecast values the price of an asset will rise. If previous values and the actual values are equal, then the price of an asset will also range.
Whatever these economic indicators exhibit, it will display themselves on a forex chart which enables a trader or technical analyst interprets and used as a forex signal.
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