Fundamental Analysis

What is Fundamental Analysis?

Every trader wants to know where the price will go. However, in order to get the most realistic answer to this question, it is necessary not only to observe the chart on the trading platform but also to constantly monitor what is happening in the world. In this, fundamental analysis helps traders.

A key referendum, the president’s commentary or a negative statistics publication can have a dramatic effect on the national currency rate.

You may have heard phrases like: “The pound fell on the news … The euro against the dollar jumped up due to the news …”. Such statements are used by the experts in their daily fundamental market analysis and reviews..

If a well-known company has poorly reported for the quarter and has received less profit than expected, this will upset investors: its shares will no longer be so attractive, will begin to be sold, and the price for them will fall down.

A long rainy season in America can ruin the cotton crop: the volume of the available consignment will be less than planned and prices will soar.

All of these are important factors that are inextricably linked to trading and are called fundamental analysis.

What events should be taken into account?

Economic, Geopolitical
Social Phenomena

Economic prospects and the general mood of the market in relation to a particular country

Natural disasters

Wars and periods of conflict between key countries

Political events

Publication of important statistics (economic indicators) by industry or country.

Major Economic Indicators

Open the economic calendar at Realms FX and find major economic indicators with two or three exclamation marks. These are publications of statistical data that have the strongest influence on the currencies of the related countries.

Typically, traders pay attention to the difference between the actual value and the forecast. The more this difference the more volatility could occur on the price chart of a dependent asset. Most often, it is the national currency of that country the news is published.

More often, you will follow the US news (they are most understandable for beginners) and the focus of your attention will be on the dollar – USD. If the American statistics turns out to be good (better than analysts’ forecasts), then get ready that the EURUSD chart can go down: yes, the dollar rate, in this case, will increase but pay attention that it stands second in the pair. Accordingly, the price of the euro in dollars will fall.

Building Permits

What is the essence: This report includes data on the total number of monthly building permits issued by the US government.

Why it should be followed: this indicator can give important clues about the future state of the economy. It makes this report a significant leading indicator for those traders who speculate on currency pairs with the US dollar.

When data is published: between the 17th and 18th of each month.

Consumer Confidence Index (CCI)

What is the essence: CCI indicates how optimistic the population is with respect to the current and future economic situation. Consumers are sent a survey, related to their future purchases. The results make the CCI basis.

Why it should be followed: strong consumer confidence demonstrates that the standard of living is rising. That means people can afford to spend more. Moreover, it increases the national economy turnover, leads to national growth and empowers the national currency value.

When data is published: the last Tuesday of each month.

Consumer Price Index (CPI)

What is the essence: This indicator shows how the cost of living has changed in a particular country: a number of consumer goods are being evaluated, including food and beverages, housing, transportation, and medical care. This data is often used to determine the inflation level.

Why it should be followed: This is one of the key lagging indicators. Based on this, traders can make predictions of potential interest rate changes and plan their trading accordingly.

When data is published: monthly.

Durable Goods Orders

What is the essence: The indicator measures the number of new resident orders for the production and supply of durable and large goods, such as engines.

Why it should be followed: This data demonstrates the rate of economic growth. The number of orders placed can give an idea of future factories workload. In turn, this affects directly both sales figures and employees’ working hours.

When data is published: on the 20th of each month.

Labour Cost Index

What is it about: This indicator fixes the wage level changes, as well as bonuses and working benefits for all non-agricultural sectors. Data for the report is collected from an employers’ survey.

Why it should be followed: Labour cost index is related to the inflation figures. Employee remuneration is one of the main company expenses. The US Federal Reserve is also monitoring this index closely and, to a large extent, relies on it when choosing the direction of the national economic policy.

When is the data published: quarterly.

Gross Domestic Product (GDP)

What is it about: this is a report that measures the total value of all goods and services produced in a country during a full year or a quarter. This publication can cause significant fluctuations in the exchange rate of the national currency. Gross Domestic Product is not only published in the United States but also in other countries (Canada, Great Britain, Japan, etc.)

Why it should be followed: this is a great opportunity to compare the economic growth rates of different countries and make a forecast on the chart movements of certain currency pairs.

When is the data published: quarterly.

Number of New Foundation Bookmarks

What is it about: The report measures the number of houses that went under construction over the previous month.

Why it should be followed: the indicator is directly related to the rate of economic growth. E.g. the continuous reduction in the number of US construction projects may indicate an impending recession. At the same time, an increase in activity may indicate a positive period in the country’s economy. The number of new foundation bookmarks also affects the dollar rate (USD).

When is the data published: around the 17th day of each month.

Changes in Industrial Production

What is the essence: Shows how much goods are produced in the country during the month. In general, in calculations are involved the financial results of industrial firms, factories, mining and energy companies.

Why it should be followed: considered as a coincident indicator. It means that any changes this report captures are happening in the economy right now. The publication indicates in which sectors growth is observed: accordingly, it is possible to determine the current trend in the national currency. The indicator, ahead of time, reflects the national employment level changes, average earnings, personal incomes and inflation figures.

When data is published: 11-12th of each month.

Primary Jobless Claims

What is it about: This indicator shows how many people became unemployed last month.

Why it should be followed: The fewer new applications, the more powerful a country’s economy is and the more stable the labour market. High employment level leads to higher consumer spending and higher GDP data. Therefore, if the actual value of Primary Jobless Claims in the economic calendar is lower than the forecast, the USDJPY price is likely to fall.

When is the data published: weekly, on Thursdays.

Interest Rate Decision

What is it about: Central banks regulate the rate at which they issue loans to the rest of the national commercial banks. It depends on the rate level how profitable it will be for foreign investors to invest in the national currency.

Why it should be followed: Interest rate decision shows how the economy has changed over time, as well as how attractive and strong the currency will be (e.g. USD – for the United States).

When is the data published: each quarter by the eight major central banks (US Federal Reserve, European Central Bank, Bank of England, Japan, Switzerland, England, Australia and New Zealand).

Money Supply

What is the essence: Money Supply measures the amount that currently available for spending in a country’s economy.

Why it should be followed: It’s the leading indicator that allows investors to predict the level of potential inflation and allows traders to get an idea about further Central Bank policy. The more money available, the more confident the country is and the better for the national currency.

When data is published: In the United States – every Thursday.

Nonfarm Payrolls (NFP)

What is it about: This major report shows how many jobs were created within US enterprises. The results are split into industry groups and do not include vacancies from the agricultural sector.

Why it should be followed: Higher employment rates may indicate national companies’ expansion – potentially impacting on the stock market. Moreover, an increase in potential consumer spending would lead to economic growth. Nonfarm Payrolls report about both the working time spent and the average rate of wages: a growth can lead to higher interest rates. If data is better than the forecast, it often pushes the EURUSD chart down.

When is the data published: on the last Friday of each month.

Producer Price Index

What is the essence: Measures changes of the price at which national producers sell their products. The report covers all inner production, excluding imports.

Why it should be followed: It is a signal for potential inflation and changes in the economic policy. It is assumed that any increase in producer costs invariably leads to higher prices for consumers. As the cost of goods and services increases, the standard of living will fall, and therefore this report can be used as a leading indicator of inflation.

When data is published: monthly, next week after NFP.

Retail Sales

What is the essence: The indicator measures changes in the retail goods value, including food, clothing and vehicles.

Why it should be followed: This is a leading indicator. Significant growth in retail sales will bring more money into the country’s economy, increase the risk of inflation and the likelihood of the Central Bank intervention. The decline in retail sales may indicate an approaching recession.

When data is published: the 13th of each month.

Trade Balance

What is the essence: That is the difference between the national exports and imports volume. When the exports’ value far exceeds the imports’ value, it’s a positive trade balance. And vice versa: when the imports value is significantly higher than the exports value, a trade deficit arises.

Why it should be followed: the report serves as a lagging indicator of the country’s economy. In addition, countries that have a significant trade deficit can accumulate large amounts of debt, which, in turn, leads to the devaluation of the national currency.

When data is published: the 19th of each month.

Unemployment Rate

What is the essence: Data shows the number of unemployed people in the country for the last month. The indicator itself is calculated by dividing the number of unemployed by the total number of capable citizens (excluding pensioners, children, etc).

Why it should be followed: A lagging indicator that triggers a “domino effect”. The unemployed are likely to cut costs – i.e. the amount of money entering the country. This Rate can lead to lower GDP and can increase the likelihood of a recession. The reverse is also true: low unemployment can be seen as a sign of economic growth.

When data is published: on the first Thursday of every month, simultaneously with NFP.

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