FOREX FUNDAMENTAL INDICATORS: Every trader should know and follow.

Fundamental analysis can be defined as the study of a country’s economic and financial performance in order to determine the fair market value and future direction of its currency. Fundamentals focus on factors that determine exchange rates, such as countries’ economic health, political stability, and environmental events. A popular way to gauge the health of a country’s economy is through looking at its economic indicators and data releases, which is why every trader should be familiar with them and how they influence the value of a currency.

Data Releases

Data releases on their own are not as important as whether they come out above or below market expectations. In other words, in addition to knowing the data that will be released, it is also important to know what the market is expecting the data to come out as. For example, if unemployment comes out at 5%, lower than the previous month’s data release of 5.1%, this may seem like good news. However, the market will react negatively to this release if the expectation was that unemployment would fall to 4.5%. For this reason, you should always know what the market is expecting in order to evaluate whether the actual data release is a positive or a negative surprise. You should also note that the more a data release deviates from expectations, the more it will impact on exchange rates.
In the short term, the market typically reacts to any data release within half an hour from the time it is announced. After that, exchange rates usually settle and give you a chance to analyse the longer term implications of the news.
You can follow the day’s major data releases and expected results on the financial/forex calendar website and many more.

Some Major Fundamental Indicators:

Now let’s have a look at some major indicators every trader should know and follow.

Interest rates:

Interest rates are perhaps the single most important indicator when it comes to determining a currency’s long term value. In fact, most other economic indicators affect a currency’s exchange rate because they imply a potential change in interest rates. Central banks usually announce interest rates every month, with the whole forex market closely watching to see what they will do.
By adjusting interest rates, a central bank can control the supply of its currency, directly affecting its value. If interest rates are increased, it becomes more expensive to borrow and more attractive to save, causing the amount of money in circulation to shrink as people store more money in the banks. The money supply is thereby reduced, and as lower supply causes higher prices, the domestic currency strengthens. Conversely, if interest rates are cut, borrowing from banks becomes cheaper and saving becomes less attractive, causing the supply of money in free circulation to increase, resulting in a weaker currency.
Note that you should focus on rate announcements from the countries whose currencies you are trading.

Gross Domestic Product (GDP):

A country’s Gross Domestic Product is the value of all goods and services produced within a country in a given time period. It represents the health of a country’s economy, which directly affects the strength of its currency. GDP is normally released monthly or quarterly, and the outcome is compared to the country’s forecasted growth.
Traers compare the actual GDP with what the market is/was expecting. If GDP exceeds the forecast, the currency is likely to strengthen, while a lower than expected GDP release tends to weaken the currency.

Inflation:

High inflation erodes the value of a currency and is therefore considered very bad for any economy in most circumstances. Central banks normally target an inflation level of around 2-3%, and if their target is exceeded, they usually take action to get back to the desired levels.
When inflation is high, the market begins to expect that central banks may increase interest rates, reducing the supply of money in the economy, and lowering inflation. The expectation of an interest rate hike will cause the currency to strengthen, as the market prices in the anticipated change in an effort to benefit from an announcement before it is officially made.
Common measures of inflation include the Consumer Price Index (CPI) and the Producer Price Index (PPI), and are usually released on a monthly basis.
Note, If inflation is above expectations, the currency is likely to strengthen, while lower than expected inflation is likely to weaken the currency.

Unemployment:

Without people who work, there would be no economic activity. For this reason, unemployment is an important gauge of the health of a country’s economy and the pace of its economic growth. Increasing unemployment (or decreasing employment, as it is sometimes also referred to as), has a negative effect on a country’s economic growth, while decreasing unemployment (or rising employment) is seen as a positive sign for the economy.
Because rising unemployment signals a troubled
economy, the market expects the central bank to reduce interest rates in order to increase the supply of money and help boost economic activity and growth. As we saw earlier, the expectation of a rate cut tends to weaken the currency.
The converse is true when unemployment is falling, a fast growing economy may soon experience increased inflation because of all the financial activity taking place, and to prevent inflation from getting out of hand central banks are likely to increase interest rates. As a result of the expected rate hike, the currency is likely to appreciate.
As well as unemployment and employment figures, other common labour-related indicators are US Non Farm Payrolls (NFP), Private Payrolls and Claimant Count, and usually come out on a monthly basis. By far the most important employment indicator is the US NFP, as it tends to have the greatest effect on the forex market. It represents the change in the number of employed people during the previous month (excluding the farming industry), and is released shortly after the month ends, on the first Friday of the following month.

Consumer-related data:

As we saw with unemployment, it is people who drive the economy, so their income and their demand for goods and services directly affect a country’s economic growth. When consumers demand more, economies tend to grow faster, and when their demand shrinks, we experience an economic slowdown.
Common consumer-related indicators include retail sales, durable goods orders, consumer confidence, consumer sentiment and ZEW (economic sentiment), and tend to come out on a monthly basis.
Note, Higher than expected sales, orders, confidence or sentiment usually result in a stronger currency, and data releases below expectations cause the currency to weaken.

Trade balance:

This number represents the difference between the value of goods and services that a country exports and the value that it imports them at. A surplus occurs if the value of exports is greater than the value of imports, and a deficit occurs if the value of imports is greater than the value of exports.
It is in a country’s interest to export more than it imports and thereby generate money that it can use to further its growth. This figure is usually released on a monthly basis.
Note, A greater than expected figure tends to be good for the currency, while a lower data release tends to be bad for the currency.

Speeches, press conferences & meeting minutes:

In addition to scheduled data releases, as a trader you should also closely follow the opinions of influential figures who vote on a country’s monetary and fiscal policies. Look out for any hints of economic improvement or worsening, changes in policy stance, or anything that can signal the future of a country’s economic state and affect the value of its currency.
In the US, the Chairman of the Federal Reserve and voting members of the Federal Open Market Committee (FOMC) are figures of influence who can move the markets and are closely observed by traders. Other notable figures include the President of the European Central Bank (ECB), Governors of the Bank of England (BOE), Bank of Japan (BOJ), Bank of Canada (BOC), Royal Bank of Australia (RBA) and Royal Bank of New Zealand (RBNZ), members of the UK Monetary Policy Committee (MPC), and the Chairman of the Swiss National Bank (SNB), among others. Furthermore, traders also pay attention to releases of central bank meeting minutes.

Should the message be dovish—that is, pessimistic—this usually depresses the value of the currency; on the other hand, a hawkish, optimistic tone usually increases its value.