Utilizing Fundamental Analysis in Forex Trading (Part – 1)
In forex trading, we know two types of analysis, namely technical analysis and fundamental analysis . In technical analysis it is believed that all news and market sentiment are reflected in price movements, so the object of technical analysis is the price movement itself, aka chart / graph. Technical analysis basically tries to find out the potential direction of price movements based on historical data on price movements, because it is believed that certain patterns tend to repeat over time ( history repeats itself ).
Meanwhile, the focus of fundamental analysis is more to study the causes of price movements. Fundamental analysis is actually not intended to estimate the next market direction; At least not directly. But certain economic events usually have an impact on the development of the market for the long term, so that analysis built on fundamental analysis is usually more valid for a long period of time.
What is the fundamental analysis?
Fundamental analysis has economic and political elements.Fundamental analysis studies the economic and political state of a country to estimate its impact on the value of the country’s currency. A forex trader who trades using fundamental analysis must always keep abreast of economic data such as unemployment, inflation, interest rates, as well as other hot news that is the focus of the market. By knowing the relationship between a country’s economy and its currency, at a certain stage a trader can predict whether demand and / or supply for the currency will rise or fall.
This will provide a distinct advantage for the trader. In economic theory, the increase in supply that is not offset by rising demand will be followed by a decrease in prices, and vice versa. By knowing the potential of supply & demand , a trader will get an “early warning” whether the country’s currency will strengthen or weaken.
Use of economic data
Economic data is usually announced by governments and independent institutions that collect and analyze it. There are several economic data that can be used by traders to find out whether a country’s economy is improving or vice versa: deteriorating.
If the report of a country’s economic data improves, it is likely that investors (both local and foreign, whether corporate or individual) will be interested in investing in the country. Well, to be able to invest in the country, they certainly need local currency. So, if economic conditions are believed to provide a good return on investment (ROI) , the demand for the domestic currency will rise which in turn will appreciate the currency.
Although the above has been said that fundamental analysis is more valid for the long term, there are also some economic data that are classified as ” big figures ” which can have a significant impact on price movements even in a short time. The data release is used by forex traders to try to take opportunities for short-term trading ( day trading ).
The following is discussed some economic data classified as big figures .
US Non-farm Payrolls (NFP)
This data was released by the US Bureau of Labor Statistics. Measuring changes in the number of workers in the previous month, but not including the agricultural industry. Released once a month, usually on the first Friday after the month ends. For example, the data announced on the first Friday of February is data collected in January.
The creation of employment is an important indicator for the projected level of public spending, which is an indicator of almost all economic activities.
If the figures released better than expected will usually give a positive sentiment for the USD, especially if released better than the previous data.
This data is a percentage of the total workforce that does not have a job and is actively looking for work. Like NFP, this data is released once a month along with the announcement of NFP data. Figures released are also data collected in the previous month. Usually also called ” jobless rate “.
The unemployment rate is an important indicator to measure the level of economic “health” of a country because the level of public spending is closely related to the condition of the labor sector. This data is also one of the data observed by the central bank’s governing council as a consideration to determine the direction of monetary policy.
Contrary to NFP, it is precisely if the data figure is released larger than expected, it will usually give a negative sentiment to the country’s currency.
Interest rate decision
Is the announcement of the decision of the benchmark interest rate by the central bank. Short-term interest rates are the most important factor affecting the value of a currency.
The interest rate is a monetary policy decided through a governor council meeting. The following is a list of the world’s major central banks and their chair / president / governor:
- The Federal Reserve (United States; usually abbreviated as the Fed) is chaired by Janet Yellen.
- The Bank of England (UK; abbreviated as BoE) is chaired by Mark Carney.
- European Central Bank (for the Euro region; abbreviated ECB). The ECB president is now Mario Draghi.
- Bank of Japan (Japan; abbreviated BOJ). The current BOJ governor is Haruhiko Kuroda.
- Swiss National Bank (Switzerland; abbreviated as SNB), chaired by Thomas Jordan.
- Reserve Bank of Australia (Australia; abbreviated as RBA), the current governor is Glenn Stevens.
- Reserve Bank of New Zealand (New Zealand; abbreviated as RBNZ), the current governor is Alan Bollard.
- The Bank of Canada (Canada; abbreviated as BoC), the current governor is Stephen Poloz.
If the interest rate is raised, then in a short time the market will usually respond by appreciating the relevant currency (the currency strengthens). Conversely, if the interest rate is lowered, the currency will usually depreciate (weaken).
In the next article, you will learn more about economic data including the big figure and the impact on price movements.
In the first part we have discussed the background of fundamental analysis as a reference strategy in forex trading. Also discussed are some economic data classified as big figures , which usually have a significant impact on price movements when the data is announced.
Well, this time we will discuss more economic data classified as big figures . Let’s start right away.
Initial claim / jobless claim / unemployment claim
This data records the number of citizens who register as unemployed to get unemployment benefits every week. In the United States, this data is announced once a week, every Thursday.
The difference with the unemployment rate is that this data is announced once a week, while the unemployment rate is announced once a month. Unemployment rate data is the percentage of unemployment rate from the total number of workers, while the initial claim is the number of people who register as unemployed.
Similar to the unemployment rate, if the initial claim increases compared to the previous data, the country’s currency tends to weaken. Especially if the announced data is higher than expected.
It is data that measures the difference between the export and import sectors. Positive numbers indicate that export activities are higher than imports. Conversely, if the number is negative then it means that imports are higher than exports.
The level of exports is directly related to the strengthening of the currency because foreign parties must buy the currency of the exporting country to pay for the goods purchased. The high rate of exports will also have a positive impact on production.
If the trade balance rises, the impact will be positive for the country’s currency.
Gross Domestic Product (GDP)
GDP (in Indonesian commonly referred to as GDP; Gross Domestic Product) is data that measures the overall value of all goods and services produced within the region (country) within a certain period. In contrast to GNP (Gross National Product) which includes income from foreign production factors that work in the country, GDP only calculates the total production of a country without taking into account whether the production is carried out using domestic production factors or not.
If the GDP figure rises, the impact will be positive for the country’s currency.
It is data that measures the number of residential construction projects that have begun on the relevant month. The survey for this data includes all housing contractors in the country.
This data is considered as an indicator of economic strength, because it deals with other industries such as banking, credit, building materials, workers, manufacturing construction and real estate. If the economy is strong, then people tend to buy new homes; on the contrary, if the economy is weak, the housing sector will also be sluggish.
Traders and analysts look at this data every month, comparing it to the previous month’s data and data in the same month in the previous year.If the data figure shows an increase, the country’s currency will usually also be appreciated.
PMI stands for Purchasing Manager’s Index. An indicator of economic “health” in the manufacturing sector. The PMI index is based on five main indicators: new orders, inventories, production, delivery of suppliers and labor.
The PMI index above 50 indicates expansion in the manufacturing sector compared to the previous month, which usually has an impact on the appreciation of the country’s currency. Conversely, if the PMI index reads below 50, that means there is a contraction. If the number stays at 50, there is no change compared to the previous month.
Retail sales & core retail sales
Measure the level of sales of goods on a retail basis within a certain period. Meanwhile core retail sales measure retail sales data without including motor vehicle sales and gasoline. This data is used by the Federal Reserve to measure trends in public spending.
If retail sales and core retail sales data increase, it will usually have an impact on the appreciation of the country’s currency.
Is a permit to build a building issued by the government through a special institution before the construction of new buildings or renovation of old buildings can be done. This data report is monitored every month by economists and traders. As explained in the explanation of Housing Starts data, the housing sector is related to other economic sectors such as banking and labor, so that it can “leak” economic conditions for some time to come.
The increase in the number of building permits issued usually has a positive impact on the country’s currency.
New home sales & existing home sales
New home sales are data on the level of sales of newly built homes. A house is considered to be sold if there has been a deposit of money or the signing of a contract for the house in the same year that the house was built or in the following year. While existing home sales are sales of existing residences. This data is considered as data that can represent growth in the housing or real-estate sector.
The increase in the second number of data is usually followed by the strengthening of the country’s currency.
Consumer Price Index (CPI)
It is data that measures the average price of several consumer goods and services, such as transportation, food and health services. CPI is calculated by following the price changes for each item and averaging them. Changes in CPI data are used to assess price changes related to living costs.
CPI is one of the data that is often used to identify inflation or deflation.This is because a sharp rise in the CPI in a short period of time usually shows an increase in inflation, on the contrary if a sharp fall quickly indicates deflation.
Producer Price Index (PPI)
PPI measures changes in the average price received by domestic producers for the goods they produce. Unlike CPI, PPI does not represent prices at the consumer level.
Such are some important economic data that are big figures.Announcement of these data is often followed by significant price movements, at least in the first 20 (twenty) minutes. By knowing what the data definition is, it is hoped that you will be able to set up your forex trading strategy after the data is released.
Congratulations to analyze.