When you research the forex market by analyzing interest rates, employment rate, International trade and manufacturing, and GDP, that is fundamental analysis. Fundamental analysis is not rocket science; instead, it is an art.
Fundamental analysts suggest that the price may be mispriced for the short term, but the market will always return to its correct value. Whether a short-term or position trader, fundamental understanding analysis is a must for you. If you successfully combine technical and fundamental analysis, your trading will improve.
Private banks borrow money from that country’s central bank. So the question is, how do the central banks get that money? The simple answer is central banks print out that money.
Central banks manipulate interest rates. Why do they do so? Because Interests rates are the most strong factor than any other factor that
influences the currency value. Interest rates have a direct impact on trade, inflation, production, and the unemployment rate.
Central banks always want to advance the country’s economy. So they try to decrease the interest rate. Decreasing interest rates encourages private banks, private sectors, individuals, production, consumption, and the overall economy.
Experts suggest that a low-interest rate can do good but for the short term. In the long run, it creates an economic bubble and overinflates the economy.
So to get rid of this situation, Central banks also increase interest rates. In this way, they discourage borrowing money from them and leave less money for private banks and private sectors.
As a forex trader, how do you get to benefit from interest rates? Focus on the situation when central banks change the interest rates. Maybe you already have noticed so many discussions on forex factory, babypips, Investopedia, parkingpips and so many forex forums and blog site discussed when these central banks’ interest rates decision changes announcement release.
Every country or economy sets a decent inflation rate that best suits it. This is called ideal inflation normally. It is fixed more or less 2%.
When there is too much inflation rate, then the currency of that particular country gets depreciates. There is more demand than supply. This time price of goods and services gets higher.
When money value gets increases, that is called deflation. This time price of goods and services gets cheaper. In the long run, in any economy, high deflation hits badly.
Money stimulates any economy, so when there is deflation, there is less money. And less money means what? Less money means less movement.
If you ask what the core indicator of an economy’s overall condition is, the answer will be GDP. It measures all services and products that any economy produces for a given period. Whether the economy of any country is growing or declining, you can understand at a glance by observing the GDP.
If GDP increases, that has a positive impact on overall of that country’s economic condition. And if GDP decrease, that has a negative impact on overall of the country’s economic condition.
Not all the countries of the world are politically stable. Just think about USA and Pakistan. The political condition of the USA is very stable, whereas the unstable political condition of Pakistan makes the country less lucrative for investments.
New investors get discouraged by unstable geopolitical conditions to invest in that country. Civil war, conflicts, and tensions harm tradable goods. Because then the chain of supply and demand gets a break. An imbalance gets created.
Suppose if there is any conflict happen among middle easts countries, then the supply of oil will be decreased; thus, demand will be increase, and the price will be high of the oil eventually.
On the other hand, if the geopolitical condition of the middle east, which produces the world’s most oil, remains calm, then we can expect that there will be a balance between the supply and demand of the oil. Thus we won’t face any spike in oil prices. Instead, the price will remain stable and durable.
Fundamental experts try to predict these conditions before these events happen and thus take advantage by holding positions before happening any major events.
Markets move by the news. Where some news is planned, and some are not. Which news are scheduled news, we can participate in this news, but which are not scheduled they just shake the market, and we simply observe. We have nothing to do with that. However, not all the scheduled news are market shaking news. Some news doesn’t affect the market. Even sometimes, some big news doesn’t affect markets.
For say, as a fundamental analyst, we all know that employment reports are more important than manufacturing sales reports. So we can expect more market movements in employment reports than in manufacturing sales reports. You will find many economic calendars like Investopedia calendar, dailyfx calendar, and myfxbook calendar. By taking help from these calendars, you can guess which news reports will have the most effect on the markets, and thus you can take action according to your analysis. Thousands of hundreds of reports publishes every day. Remember, not all the news will be as important as NFP, the central bank’s monetary policy report.