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Fundamental Analysis – Economic Indicators
For many successful Forex traders, the statistics within the macroeconomic indicators provide the heartbeat of an economy. As well as gaining a better understanding of the intrinsic value of an asset, fundamental analysis determines the volatility of the market too. Here we will look at the different indicators and how to use and understand them.
Employment/Unemployment Indicators
When looking at the total health of an economy or where the economy is in regards to its business cycle the employment (or indeed unemployment) indicators will tell the analyst if there are jobs being created within the economy, what percentage of the workforce is actively working, whilst also stating how many people are claiming unemployment benefit. When looking at inflation, employment indicators will give the analyst the speed in which wages are rising or falling.
Governmental Monetary and Fiscal Policy
The monetary policies of a government relate to the official policy regarding the financial markets as well as the money and credit supply, whilst fiscal policy is in reference to taxation – income and expenditure. Governments use these to provide a stable economy which includes inflation control, an equal balance of payments and total employment.
Interest Rates
One of the central elements to the volatility of currencies is interest rates. Set by central banks, they dictate the investment flows and because of the impact they have upon the movement in the forex market as representations of a country’s economy, they remain a key indicator for investors to focus their analysis on.
Consumer Price Index – CPI
Inflation is an important part of the economy and the CPI is considered by many as the most important indicator when estimating for inflation. It is directly linked to a currency’s purchasing power and impacts upon the nations’ standing within international markets. In a normal economy where conditions are stable, a rise in the Consumer Price Index may lead to a rise in interest rates, which subsequently may result the currency becoming more attractive for investors.
RSI – The Retail Sales Index
The Retail Sales Indicator is released every month . month. Forex traders find this important due to the fact that it highlights the total power of consumer spending and the success in retail outlets. It gives a good indicator of general consumer spending trends that can be altered depending on what season it is. The retail sales index will, at a very basic level, provide a good indication of consumer confidence and what people are doing with their disposable income and when used in conjunction with other indicators will tell the trader what direction the economy is moving in.
Balance of Payments
The balance of payments signifies the ratio between the payments coming from outside the country and the payments heading outside the country. It highlights the entire foreign trade transactions, the trade balance, transfer payments and the balance between import and export. If a surplus is recorded, i.e. payments received exceed payments going out, it is a favorable condition for national economic growth.
Gross Domestic Product – GDP
Considered the most encompassing measure of an economy, it displays the value of what is produced (goods and services) within an economy over the course of a year. The GDP is seen as a lagging indicator and the majority of traders centre their attention on two reports released prior to the publication of the final GDP reports; the advanced report as well as the preliminary report. Major changes between the two reports can result in increased market volatility.
When learning to be a Forex and CFD trader, there are a number of economic indicators that can be used to analyze the basics of foreign currency trading. Learning these economic indicators and how they impact upon the economy, and then using them in conjunction with other forms of technical and fundamental analysis will give the traders a much greater chance of success.
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