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 and social phenomena;
– economic prospects and the general mood of the market in relation to a particular country;
– natural disasters (extreme weather conditions, earthquakes and hurricanes that cause serious damage);
– wars and periods of conflict between key countries;
– political events (presidential elections, referendums, forums);
– publication of important statistics (economic indicators) by industry or country.

Natural disasters

When we speak about natural disasters, we mean extreme weather occasions, such as floods, earthquakes, hurricanes and tsunamis. Mass casualties, damage to infrastructure and a general sense of fear can have a detrimental effect on a country’s economy, especially since the government will have to allocate a considerable recovery budget.

As a result, the national currency inevitably weakens. So, e.g., the Japanese yen slipped by 0.4% against the US dollar after the catastrophic earthquake and tsunami of 2011, which led to the death of 15000 people, thousands of wounded and missing.

Hostilities Countries, involved in a military conflict, should finance armaments, cope with losses and even warn them, as well as control the mass consciousness due to fear and chaos reign. All this, of course, destabilizes the economy.

Consequently, prolonged confrontation can lead to significant market volatility and cause the depreciation of the national currencies of the warring countries.

Political factors

The highlight of this category is the president’s election. This events, as a rule, cause increased fluctuations (volatility) in the national currency course. If it’s the likelihood that the upcoming elections could lead to a change of government is high enough, then political instability will lead to a decline in the exchange rate of national currencies.

Other significant events include comments of politicians after the meetings, unexpected management decisions, scandals, international sanctions, confrontations, results of the negotiations of the countries leaders etc.

Economic indicators

The main tool of the professional trader is the Economic Calendar. At the moment of the actual statistic data publication, it immediately appears in the rightmost column. It also indicates the publication time, the name of the indicator, its description, the previous and predicted value.

Here are examples of the most important economic indicators (in the Calendar they mark by three exclamation signs):

  • Central Bank interest rate decision
  • Nonfarm Payrolls (NFP)
  • Unemployment rate
  • Consumer Price Index
  • Gross Domestic Product (GDP)

How does the release of an economic indicator cause price movement?

To answer this question, let’s take as an example the major employment data outside the agricultural sector in the US – Nonfarm Payrolls. This is a monthly report that reflects changes in the number of urban jobs over the past month. Relatively high values are considered positive for the US dollar (USD), causing a growth rate (the more jobs, the more money from the population, the higher purchasing power, the stronger economy, the more attractive for investments).

And vise versa: the data below the forecast usually provoke a decrease in USD.

As a rule, macroeconomic indicators do not affect just one asset, but several at once.

For example, Nonfarm Payrolls, although directly related to the United States economy, also affects the movement of the pound (GBP) or the euro (EUR), because they make pairs with dollar (GBPUSD and EURUSD, respectively).