One of the oldest methods of analysis in the economics is fundamental analysis (FA). This facet of the analysis is much less easily applicable to trading. Concretely, FA focuses on considering the economic-fundamentals of the currency/foreign-exchange (forex), i.e the circumstance of financial aspects among various nations (that might be different continent as well). For this, we rely on several factors factors such as (firstly and essentially) the foreign national banks’ interest-rates, and economic—monetary and financial— statistics. Hypothetically, if the economy of such nation is progressing nicely, investors should be encouraged to invest their fund to the currency, and in the meantime increases its price.
The Influence of (CB-central-bank) Interest Rates
CB’s rates are the foundation of the economy of particular nation. By the national banks rates, one can figure the loan rates of both the individuals and the companies, which may impacts the local economy.
This rates have two inverse impacts on the forex market: the shorter and more extended term influence.
If interest rates are low, credit is cheap. Businesses are therefore encouraged to invest, and households are encouraged to spend. If the rates are low, saving becomes less attractive. This situation is somehow generating growth. If interest rates are high, credit is more expensive and less accessible. It is therefore less profitable to invest for companies, and household consumption is constrained. In addition, the high remuneration of savings encourages them to spare as opposed to spend. This situation tends to dampen growth and rising prices
However, interest rates additionally have directly affect the forex market. Indeed, when the rate of a national bank is increasing, local currency turns out to be increasingly attractive since the deposits in this currency, cash are better remunerated.
Conversely, low interest rates result in less deposit installments, and therefore, keeping the currency is less appealing.
By this means, a drop in ECB rates, for instance, will have descending effect on the EUR / USD at the time of the announcement, as well as a rise in the Federal Reserve’s rate. . With the same contextual means, a rise in ECB rates will have a short-term raising effect on the EUR / USD, as well as a drop in the Fed’s rates.
It ought to likewise be noticed that to the degree that monetary standards are quoted in pairs, we must look at the rate-differential between both pairing currencies, the one with the best rate having a comparative advantage.
Higher rates in the United States than in Europe should therefore have a negative influence on the EUR / USD pair, while higher European rates would benefit the Euro and therefore lead to a rise in the EUR / USD pair.
Interest rates are therefore the economic pillars of the forex, the foundations of the global economy.
However, rates are not changed often, so operators rely on other data to analyze and forecast currency movements. This is what we will see below.
Influence of economic statistics
Numerous economic statistics are published every day: Unemployment rate, GDP, manufacturing indices, industry orders, consumer morale, etc., etc.
It is therefore a question of measuring all the factors having an influence on the economy. Normally, if a statistic is satisfactory, it should benefit the corresponding currency.
It should also be noted that some statistics are more influential than others. For example, weekly statistics are less important than monthly statistics, which themselves are less important than quarterly statistics.
To know if a statistic is influential or not, do not forget to check our forex economic calendar. We also draw your attention to the fact that statistical publications are often the occasion for violent movements. We will have to remain cautious about these figures.
The notion of consensus
the notion of consensus is paramount when one tries to predict the influence of a statistic on a currency. Indeed, several agencies conduct surveys before statistics publications, to find out what economists and traders anticipate.
Thus, very bad or very good statistics will have little influence if the consensus had anticipated it.
Conversely, a statistic that may appear satisfactory may have a negative impact if the market had hoped for even better!
How to take into account FA as a novice forex trader?
So we quickly understand that it can be difficult to rely on FA to make short-term trading decisions. However, some tips are to be deduced from these notions.
What you must remember: Statistics and interest rates can be very influential on the forex. It is therefore advisable to remain cautious when they are published.
Either try to take advantage of the influence of statistics, which we think is very risky!
For more information on FA and news trading, we invite you to discover our dedicated section.