Fundamental analysis is conducted mainly through analysing economic, social, and political factors that influence the market demand and supply. Investors who rely on fundamental analysis must find out the various factors that affect the economy, such as those that will boost the economy to grow rapidly, and those that will drive it down.
This method of analysis is based on the assumption that a country's currency will be strong when its economic outlook is good. The reason is that the better a country's economic conditions, the more foreign companies and investors will be willing to invest in the country, and they need to buy a large amount of local currency to acquire assets.
For example, the US economy has been improving. As the US economy advances, it allows the policy makers to control the excessive growth of the economy and inflation by raising interest rates. Higher interest rates will make dollar-denominated assets more attractive, and lots of funds aiming to earn high interest may flow into the United States, pushing the value of the US dollar even higher.
There are many advantages to trading based on fundamental analysis. Most importantly, changes in a currency pair, a country's economic conditons, or corporate earnings, are the core factors in determining the medium-term and long-term trend of the currency or stock index.
When you have enough knowledge about the industries and economic trending of a region (or a stock index or a firm), you may also choose to hold the relevant currency pair or stock index for a long time, without the need to trade tracking the daily quotes all the time. You may wait until your currency pairs or stock indices correct back or rally to go long or short.
A variety of fundamental changes will influence currency pairs. Out of these changes, interest rate expectations tend to have the biggest impact on the strength of a country's currency, and investors can trade accordingly.
If a country's released inflation data keeps surpassing the central bank's target, the central bank will influence the local currency according to its own inflation target by raising or lowering interest rates.
Usually, the central bank will raise interest rates to reduce the amount of money in circulation and curb inflation. If the central bank wishes to increase the amount of money in circulation, it may do so by lowering interest rates. Generally, as the difference between a high-interest currency with a low-interest currency widens, hot money will tend to flow into the high-interest money market, driving the demand for money higher. This is one of the reasons for the rise in medium-term and long-term exchange rates, and investors may capture these opportunities to invest.
Fundamental analysis refers to analyzes the macroeconomic conditions of the country to predict the basic trends and exchange rate changes based on the driving factors of market fluctuations. Generally, when a country's economy strengthens, its currency exchange rate will rise, and when the economy goes down, the currency exchange rate will decrease.
Because the US dollar is the world's trade and settlement currency, the US dollar has an absolutely dominant position and advantage in the foreign exchange market. The economic condition of the United States is the main factor affecting the foreign exchange market. Therefore, Its economic data gets the most attention from forex investors.
According to statistical analysis, the effect of different economic data on the market in order from strong to weak is:
Interest rate resolution, unemployment data, GDP, industrial production, foreign trade, inflation rate, producer price index, consumer price index, wholesale price index, retail price index, purchasing managers' index, consumer confidence index, business climate Indexes, construction data, factory orders, personal income, car sales, average wages, commercial inventory, leading economic index and more.
Of course, under different market conditions, the impact of data will vary. For example, when certain economic data has a larger difference than expected, its impact on the market will be magnified. For example, before the Monetary Easing changes, the employment data, inflation, and other data will be more concerned. During the period, important economic events, official speeches, and politician speeches will have a greater impact on the market.
In actual transactions, investors do not need and cannot analyze all the data one by one, but it is necessary to grasp the changes of the market focus and the market's response to what changed. Of course, for a successful investor, predictions and judgments must be made before the indicators and data are released, and the trading strategies should be determined when the data is released.
In addition to relying on technical analysis, fundamental analysis has an important impact on the exchange rate trend, and Mitrade's economic calendar will effectively help clients discover opportunities from the fundamentals.
For example, if you wish to trade USD/JPY, then you would want to watch for events and data of the US and Japan before placing a trade, and should only look at the data for the next two weeks to analyse your position opening strategy. You can use our economic calendar to select the relevant data and analyse it yourself.
Theoretically, price fluctuations should fully reflect all the valid information on the market. Unfortunately, for investors, that is not always the case. It is impossible for the market to simply and directly reflect all the information, because not all investors will place orders in the same manner. Sometimes we need to measure the market sentiment. Through various trading data and ratios of long and short positions provided by brokers and third-party market analysis organisation, we can effectively know whether the current market sentiment is bullish or bearish, which is very useful for analyzing trading trends.
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