High-impact Fundamental Indicators in Forex Trading

Posted by Makhale Ntsekele on March 13th, 2019

Fundamental analysis in online trading is a method of analysis that attempts to gauge a currency’s future direction by looking at the overall state of the country’s economy or in some cases at a more granular level. Therefore, a forex trader relies on economic indicators and events to measure how well a country is performing. Optimism in an economy causes the currency rates to rise as demand for the currency increases while a more pessimistic outlook will cause growth to stagnate and in turn price depreciation.

Forex trading investors are not the only ones looking at these data points, however. The various central banks of different countries also closely examine how the economy is doing in hopes of effecting monetary policies that promote steady but deliberate growth according to demand and supply.

The financial metrics used to measure the health of an economy include the Gross Domestic Product (GDP), Nonfarm Payrolls (NFP), Unemployment Rate, Federal Funds Rate, Consumer Price Index (CPI). Industrial Production Index etc. The list goes on and on.

There are so many financial statements and reports coming out from both governmental and commercial entities that it’s almost impossible to analyze all of it in a meaningful way. And then you must also keep an eye on the news in order to have a current impression on the market sentiment and how the financials stack up to the investors’ actual expectations.

Thankfully, there are several economic calendars feeds that help keep track of all these news and events. An economic calendar is an invaluable tool in forex trading since it affords both beginner and experienced traders with a way to stay up-to-date in regard to potential price direction. The reason that a forex trader needs to stay informed about these events is also because of the market volatility they generate. Volatility is the name of the game in forex trading as it influences the rates, trading volume and spreads.

If you want to invest in forex trading, you must look to trade currency pairs with high trading volume. These are the ones with lower spreads which is the actual cost of trading forex. The currency pairs with the highest trading volume or liquidity are called the Majors and obviously are the ones that have the USD as an underlying currency. These consist of the EUR/USD, USD/JPY, GBP/USD and USD/CHF.

The top 4 market-moving economic indicators

As we already mentioned, there are hundreds of daily, weekly and monthly reports that make fundamental analysis a bit cumbersome to follow. Since trading forex, however, is a highly liquid market, it takes highly influential statements to move the market in the short term. As such, retail online trading focuses on 3 main fundamentals which have the power to affect the market substantially:

• NFP and unemployment data
• Inflation metrics
• GDP

NFP

The NFP is first on the list because it is arguably the most high-impact piece of news on the monthly calendar. Every forex trader needs to keep an eye on this report since the market always reacts wildly during its release. Even if you don’t enjoy the high-risk high-reward volatility the NFP presents, you still need to be aware of its upcoming release in order to avoid trading forex during that time.

The reason why NFP has such power over the financial markets is that it provides an accurate metric of the employment rate in the US and therefore it can instigate huge price spikes in mere seconds - in both the USD and gold.

Watch the calendar for NFP’s release, on the first Friday of every month by the United States Department of Labor.

Inflation metrics

Inflation is a measure of the price of goods and services and how that changes over time. In layman’s terms, the cost of living in a country. Low inflation means your money has more buying power and as such, it is a highly preferred status quo. Central banks need to control inflation with their monetary policy in order to balance out an economy’s growth.

When the value of currency runs rampant, the central bank will tighten its policies to try and halt inflation. On the other hand, when the economy needs a boost, the bank will likely loosen its monetary policy to promote growth and expansion. Therefore, knowing where inflation is headed during a time period is a great opportunity for a forex trader since it provides insight into the central banks’ next move.

If you want to be informed about inflation rates, the CPI report comes out every month on different days, so keep an eye on your calendar.

GDP

Finally, the Gross Domestic Product index or GDP provides the most extensive look into an economy. It’s a highly important indicator in forex trading because it reflects the country’s growth as a whole.

The GDP is published in quarterly intervals and affects currency pairs both in the short and long term. If the GDP sees increased growth, it has a positive impact on the forex trading market. If the report, however, shows growth that doesn’t correlate with the initial expectations, it’s likely to have a negative effect on the currency’s rates.

Conclusion

Online trading with currencies and commodities is a speculative market and forex traders have found success using various methodologies of analyzing and interpreting relevant financial data for their advantage.

These fundamental indicators always provide opportunities for the aggressive investor, but you should always be cautious when trading during these events as they inject high volumes of volatility and an incorrect assessment of the market could easily mean the loss of your invested capital.