Forex fundamental analysis is a study of the economic climate in countries whose currency the traders trade and how the economic factors affect the price of those currency.
It provides information on how the big political and economic events influence the currency markets. Speeches that include economic numbers given by important politicians and statesmen can have a considerable affect on the price of a currency and they should be closely watched especially those speeches that concern the United States and therefore the dollar.
It is important that as a trader the economic calendar is checked for upcoming economic news. The calendar is the creation of economists who predict upcoming economic figures before they are announced and once announced the numbers are compared to the consensus forecast. As you can see from the calendar extract below each announcement has an importance factor attached to it.
The more important the data is the more volatile the market will be immediately after the news release. The highest volatility is in the first 3 or 4 minutes but can continue for 10 minutes before settling down to reflect the new market swing reflecting the data. Volatility is dependent on how positive or negative are the actual data when compared to the forecast data and how important the economic data is.
The key fundamental economic data that traders should watch out for and know when they are going to be released are:
Interest rates – Investors tend to move assets to the higher rates.
Employment – Reduction in employment often leads to a weak economy.
Trade Balance – A trade deficit usually means that the local currency is weak.
Gross Domestic Product – The primary indicator concerning the health of the economy.
When using an Forex economic calendar a trader should be aware of the importance of the data, the timing of the news release, what impact will differences between the forecast numbers and the actual numbers have on the market and when any reversionary data is due as that to can have an impact on price?
Other areas which are important for a fundamental trader to watch carefully are speeches and announcements made by key political and banking people. Any speech by the chairman of a central bank is worth listening to, especially the chairman of the Federal Reserve Bank. Also speeches by key economic ministers such as the Secretary of the Treasury in the United States and the Chancellor of the Exchequer in the UK should be watched for any economic announcement that might cause currency price movements.