Fundamentals play a key role in the movement of price on the foreign exchange market. In fact the market only really adheres to two main forces and one of those forces is the fundamental or economic situation of each country.
As a trader you are primarily concerned with the fundamental news in the form of announcements that are released throughout each month.
These announcements are released at pre set times in advance so that traders can prepare for them.
Not all of these announcements are of equal importance so I will show which ones to watch out for why you need to keep your eye on them and what to do when they are released. The other thing to bear in mind is that one particular piece of news will not remain a traders favourite forever, as events in the economy change different news will hold different importance as time goes by.
First let’s get familiar with the most important ones or the ones that contribute the most to the driving of the price in a certain direction.
These are watched very closely by traders, because they give an indication of how attractive an economy is to investors and thus how valuable the currency of that country is. The higher the interest rate the more valuable the currency of that country is considered.
This is also watched very closely by traders because it can be used as a pre curser to interest rate changes.
If a country has rising inflation there will be an increasing desire for the central bank of that country to raise interest rates in order to combat the rise. The reason they do this is that they have an inflation target and if this target gets missed interest rates are used to bring it back under control.
Trade balance shows money flow. If an economy is exporting more than it is importing demand for that economy’s currency will increase which will increase that currency’s value. If an economy is importing more than it is exporting demand for that economy’s currency will decrease which will decrease that currency’s value.
If the number of jobs being created is increasing it is a sign of a strong economy. If the economy is strengthening the currency of that country will most likely remain strong.
If the number of jobs being created is decreasing it is a sign of a weakening economy. If the economy is weakening the currency of that country will most likely lose value.
GDP or gross domestic product measures the change in value of all the goods and services produced by the economy.
This is the broadest measure of a countries economy and so traders use it as a primary gauge of the health of the economy.
This is another pre curser to the overall health of a countries economy. It measures consumer spending which has a knock on effect to the whole economy a rising number is good for the currency of that country.
This is effectively an employment indicator but the trading world seems to place a huge amount of emphasis on this particular announcement which results in huge volatility during its announcement, it is released on the first Friday of each month.
The market has a fascination with trying to decipher where a currency will go before anyone else this is demonstrated during speeches given by the heads of each nation’s central bank.
Traders try and pick up on every single word spoken looking for clues as to the intentions of the central bank regarding economic policy.
For example if a governor states that the central banks are “attentive” to inflation this will most likely be construed to mean an interest rate increase in the near future.
Even though the interest rates haven’t actually been changed this prospect alone can be enough to drive the market up or down hundreds of pips in a couple of hours…purely on the expectation derived from interpreting these speeches.
This alone makes them very important for traders to watch.
Fundamental news announcements are very important and can have a big impact on the movement of the currency that they relate to.
Many people have little or no idea of what they should do or how they should handle these announcements as they are released.