Fundamental indicators make it easier to predict whether a currency is about to increase or decrease in relative value. As opposed to technical indicators, which indiscriminately focus on the numbers, fundamental indicators account for material developments in the real world.
1. The 10 Most Important Fundamental
Indicators (Forex Trading)
Fundamental indicators make it easier to predict whether a currency is about to
increase or decrease in relative value. As opposed to technical indicators, which
indiscriminately focus on the numbers, fundamental indicators account for material
developments in the real world.
Using fundamental indicators is especially important for individuals developing a forex
trading strategy. As you might expect, the value of currencies are extremely related to
political, economic, and other types of events. After addressing the influence these
events can have, you will be more likely to successfully open and close your position.
In this article, we will discuss ten of the most relevant fundamental indicators for forex
traders. When news relating to each of these indicators is released, you can
immediately adjust your portfolios in response. By accounting for the nuances and
complexities that exist in a forex market, you can develop a well-rounded forex trading
strategy with a higher rate of return.
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2. 1. Inflation
Inflation influences the value of a currency more than almost anything else. Inflation is a
term used to describe how, over time, currencies tend to lose their spending power.
When inflation is high, demand for that currency will decrease, causing its value to drop.
Unfortunately, inflation is something that can only be inferred indirectly. One of the most
popular methods for measuring inflation is following the money supply (M1). Another
popular method is looking at the consumer price index (measured below).
2. GDP Growth
Gross Domestic Product (GDP) is a figure that, roughly speaking, illustrates a nation’s
economic output within a single year. When all else is equal, higher GDP growth will
correlate with higher currency values. GDP represents multiple different categories of
economic activity, including government spending, business investment, net exports,
and personal consumption. GDP (PPP) is also a useful metric for evaluating the
economic activity and spending power of a nation’s average citizen.
3. Interest Rates
Though it is not responsible for literally printing the money (that would be the mint), the
Federal Reserve directly influences how much money is in circulation. While the Federal
Reserve has multiple different ways to control the money supply, it often relies on
changing interest rates. Because the Federal Reserve controls the rates banks can
borrow at, it can influence how much money is actively being moved around. As soon
as the Federal Reserve—or central banks from other countries—makes an
announcement, currency values will immediately change.
4. Consumer Price Index (CPI)
As suggested above, the Consumer Price Index is one of the most reliable methods for
measuring the relative value of the dollar. The CPI is calculated by tracing how a typical
“basket” of common consumer goods changes in value over time. When the dollar is
weak, it will take more dollars to buy the same products. Signs of a weakening currency
may cause forex traders to allocate their wealth elsewhere (such as other currencies).
5. Employment Reports
Employment reports are a good way to roughly measure where, exactly, an economy
might be moving. While there are many valid criticisms regarding the way employment
rates are calculated (and reported), improved employment rates are generally a positive
sign. When more people are working, the demand for that nation’s currency will
increase in response.
6. Retail Sales Reports
3. Retail sales reports, though considered by some to be lagging indicators, show how
much money is being directed into the retail economy. Retail spending, when compared
to retirement savings, takes place within a much quicker timeframe. When retail
spending is high, the economy is likely doing well. Retail spending is also very cyclical;
if you are able to pay close attention, you may be able to make some low-risk currency
investments during specific times of the year (such as the holiday season).
7. Tariffs (Capital Mobility)
A tariff is used to describe a tax applied to goods either coming into a nation or leaving
that nation. Because additional tariffs decrease what a given unit of currency can do
(i.e. keep its full value as it moves overseas), additional tariffs will almost always cause
the value of a currency to decrease. This phenomenon has already been seen in the
ongoing trade war between the US and China. On the other hand, removing tariffs will
have the opposite effect.
8. Institute of Supply Management (ISM) Report
Supply chains play a very important role in any economy. Because supply chains occur
before consumer spending can take place, paying attention to changes in these chains
may help you get ahead of the market as a whole. The ISM report, which uses fifty as
the baseline, measures whether demands have been increasing or decreasing. When a
reading drops below 50, this indicates lower levels of production, suggesting potential
currency issues may be emerging.
4. 9. Stock Market Indices
Stock markets operate using their national currency. While it is possible to indirectly
invest in another nation’s stock market using your own currency, the money will need to
eventually be converted one way or another. As a result, stock market surges—
especially surges concentrated in a specific area—typically fuel demand to hold that
currency. When American stock market indices, such as the S&P 500 or DOW, increase
in points, the dollar can be expected to become more powerful.
10. Consumer Confidence Reports
Consumer confidence reports make it easier to see how the “average” person is
experiencing a given economy. While these reports often heavily rely on subjective
measures, they are surprisingly accurate for forecasting when a recession may be
about to occur. If consumers, as a whole, are losing faith in the economy, then they will
be more conservative with their spending and their currency will become less liquid.
While these reports should probably be interpreted along with other indicators, they
certainly offer a unique perspective.
Conclusion
Before opening a new forex position, be sure you have evidence the currency is about
to increase in value. Fundamental forex indicators are both easy to interpret and
strongly correlated with value increases. Using any of the options mentioned above can
help improve your forex trading strategy.