What is Fundamental Analysis?
Fundamental analysis in forex attempts to predict currency moves by studying interest rates, government policies, business cycles, and economic growth in the 2 countries where the currencies are being compared. It considers all the variables that could affect the supply and demand for any particular stocks, commodity, or financial instrument. Fundamental analysis could find that a prediction about price movement is correct at some point.
There are 11 Economic Indicators that can affect indices and currencies movements. They are:
Gross Domestic Product(GDP)
GDP is a measurement of the monetary value of all finished goods and services made within a specific period
Can be calculated in 3 ways and they will all arrive at the same answer:
a) Spending approach. GDP = C + G + I + NX, or (consumer spending + government spending + investment + net exports)
b) Production approach= Selling price less purchase price
c) Income approach = GDP = Employees salary + gross operating surplus(profit of all businesses) + gross mixed income(unincorporated small business) + (taxes – subsidies on production and imports).
Recession is defined as 2 consecutive quarters of contraction. Recession ends once there is a quarter of growth.
Non Farm Payroll(NFP)
Announce 1st Friday of the month. Number of additional jobs added compare to the previous month.
Excludes farm work, unregistered self-employment and employment by private households and business owners
It excludes nonprofit organizations and the military and intelligence agencies.
The Federal Open Markets Committee (FOMC) meets eight times a year to determine US monetary policies.4
Lagging indicator during recovery of a recession, unemployment rates tend to rise even though GDP and non farm payroll is improving. High employment rate is Bearsh for currencies. Unemployment rates is highly correlated to consumer sentiments.5
Consumer Confidence Index
Consumer Sentiment Index(Michigan)
How consumers are feeling. If confident they will spend more.6
Consumer Price Index(CPI)
Measure inflation; if inflation is high, market may perceive FED will increase interest rate which is bullish for the US dollar.7
Industrial Production Index
Manufacturing, mining, and gas and electric utilities. Manufacturing accounts for 20% of US GDP. Used to predict how GDP is performing.8
This indicator gauges how the US manufacturing sector is running as a proportion of full capacity. Generally below 78 tend to point to a recession.9
Strong Retail Sales means economy is growing and may raise inflation concerns.10
Durable Goods Order
Released around 18 business days into the month. Expensive goods that can last more than 3 years.11
Initial Jobless Claims
A weekly report that measures the number of people making first-time claims for unemployment benefit insurance.