Fundamental analysis is one of the main components of forex trading. The concept behind this kind of analysis is that economic performance drives supply and demand of a currency, and these factors determine its value. Because of that, forex traders monitor economic data in order to figure out if an economy is doing well or not.
Basically, indicators reflecting good economic performance are positive for a currency because it shows that the country is growing, which means that there will be strong demand for its assets. It might also be a hint of future interest rate increases, which means higher returns on its securities in the near term. On the other hand, indicators reflecting poor economic performance are negative for a currency since these show that the country is contracting, which means that there's low demand for its assets. This could also be indicative of an interest rate cut in the future, which would result to low returns for the country's securities in the coming months.
First and foremost, the GDP or gross domestic product is the main indicator of economic performance. This is very closely watched by most forex traders since it measures all the products and services produced by the economy. The figure is usually reported on a quarterly basis and in percentage form, reflecting the relative performance of the economy from the previous periods. Because it is printed less frequently compared to monthly economic data, it tends to have a big impact on the respective currency.
Another high-impact economic report is the employment data. This is treated as a leading indicator of economic growth as an increase in hiring tends to result to higher consumer spending while a drop in employment usually translates to lower consumer spending. On top of that, average wages are also monitored as indicators of whether consumers will be more willing to spend or not.
Next, the consumer spending or retail sales release is another important economic indicator for forex traders. Aside from showing how much consumer spending will be able to contribute to overall economic growth, stronger than expected retail sales means that manufacturers and producers will have to pick up activity and hiring in order to cater to the rise in demand. On the other hand, weaker than expected retail sales data means that the manufacturing and production industries will have to reduce their activity and hiring as demand wanes.
Inflation or CPI (consumer price index) is also a high-impact economic report. Inflation figures are usually viewed as hints of whether the central bank can afford to tighten or loosen monetary policy in order to keep their economies stable. Weak inflation shows room for further easing, which translates to increased liquidity or lower interest rates, resulting in weak returns for the currency and dragging down its value. High inflation means there's scope for monetary policy tightening, which translates to tight liquidity or high interest rates, resulting to higher returns for the currency and pushing up its value.
Basically, indicators reflecting good economic performance are positive for a currency because it shows that the country is growing, which means that there will be strong demand for its assets. It might also be a hint of future interest rate increases, which means higher returns on its securities in the near term. On the other hand, indicators reflecting poor economic performance are negative for a currency since these show that the country is contracting, which means that there's low demand for its assets. This could also be indicative of an interest rate cut in the future, which would result to low returns for the country's securities in the coming months.
First and foremost, the GDP or gross domestic product is the main indicator of economic performance. This is very closely watched by most forex traders since it measures all the products and services produced by the economy. The figure is usually reported on a quarterly basis and in percentage form, reflecting the relative performance of the economy from the previous periods. Because it is printed less frequently compared to monthly economic data, it tends to have a big impact on the respective currency.
Another high-impact economic report is the employment data. This is treated as a leading indicator of economic growth as an increase in hiring tends to result to higher consumer spending while a drop in employment usually translates to lower consumer spending. On top of that, average wages are also monitored as indicators of whether consumers will be more willing to spend or not.
Next, the consumer spending or retail sales release is another important economic indicator for forex traders. Aside from showing how much consumer spending will be able to contribute to overall economic growth, stronger than expected retail sales means that manufacturers and producers will have to pick up activity and hiring in order to cater to the rise in demand. On the other hand, weaker than expected retail sales data means that the manufacturing and production industries will have to reduce their activity and hiring as demand wanes.
Inflation or CPI (consumer price index) is also a high-impact economic report. Inflation figures are usually viewed as hints of whether the central bank can afford to tighten or loosen monetary policy in order to keep their economies stable. Weak inflation shows room for further easing, which translates to increased liquidity or lower interest rates, resulting in weak returns for the currency and dragging down its value. High inflation means there's scope for monetary policy tightening, which translates to tight liquidity or high interest rates, resulting to higher returns for the currency and pushing up its value.
About the Author:
Fundamental analysis is an important component of forex trading, which is why economic reports play an important role in determining price action. Learn all about the main economic releases that you should watch out for when you trade forex Nice forex article
No comments:
Post a Comment