Fundamental analysis allows us to forecast market movements not just in the long run, but also in the near run, such as after big economic announcements. Currency pairs change fairly quickly in response to some economic news items.
Analysis regarding macroeconomic info doesn’t provide fx traders a unique signal of ideal items of entry or perhaps exit, unlike intricate Technical Analysis, although it can aid these traders to foresee the direction regarding a trend. Additionally, the markets predict events, and swap rates are usually a little bit removed from their particular actual values.
A country’s economic health is determined by several factors, including the bank interest rate, unemployment rate, inflation rate, and fiscal policy. Other political data has an impact on the market since it influences the level of trust in a country’s administration.
Governments can sometimes intervene in the forex market to increase or decrease the value of their currency while doing nothing to prevent rumors of such intervention; central banks can also have an impact on the forex market (usually temporarily) when they buy or sell currencies to control inflation.
-> How monetary policy affects your investments
-> How do fundamentals affect prices on the forex?
-> The euro (EUR) – Main characteristics
-> The US dollar (USD) – Main features
-> The British pound (GBP) – Main features
A wise forex trader keeps track of significant Economic Data and Reports by checking the economic report calendar regularly. However, it is normal for financial markets to react in anticipation of these announcements; in this case, it will be the difference between the expected value and the actual figure that is released that will have an influence, not the actual announcement.
->Economic report calendar
As there is so much economic news produced every day, it is impossible to keep track of all of the indicators; you should only pay attention to those that have a substantial impact on the markets. Keep up with the important data that impact the markets, such as GDP, inflation (using the producer price index or the consumer price index), the number of jobs generated in the US (non-farm payrolls), interest rate announcements, and so on.
Each country has its own set of indicators that influence the value of its currency. However, a trader should first look at what’s going on with the US dollar, as US economic news has a big impact on other currencies’ rates.
-> The main US economic indicators
-> Long-term TIC transactions
-> The main economic indicators of the European Union and the euro (EUR)
-> The major economic indicators for the United Kingdom and the British pound (GBP)
-> Fundamental factors that affect the currency markets in the short term
Indicators should be compared to historical data; they are crucial in the financial markets. However, the element of surprise associated with their disclosure affects the markets; most reported results diverge from forecasts, and the more short-term impact on the currency price will be substantial!
Economic indicator historical data
The industry that is quiet before the monetary news review or figure is released can be quite a signal that high movements are about to appear. It is, for that reason, far better to wait some sort of few minutes following your news is unveiled before positioning on your own on the industry.
-> Trading using the Non-Farm Payrolls
-> The central banks’ interest rates
-> Interest rates and inflation: their impact on currencies
-> Deflation – definition and effect on the economy
-> The other economic indicators that impact the value of a currency
In this series of articles, we explore the numerous fundamental research methods that big investment bank analysts use to forecast currency price changes. These models might help traders who wish to learn more about fundamental analysis and how it applies to the forex market. There are currently seven main exchange rate forecasting models:
Balance of payments theory (BOP)
The purchasing power parity model (PPP)
Interest rate parity (IRP)
The monetary exchange rate model
The interest rate differential model
The asset market model
The currency substitution model
Each of these models has its own set of benefits and drawbacks when it comes to assessing and Forecasting Currency Price Movement. They have fallen out of favor in some circumstances because economists believe that better appropriate models exist or that the premises on which they were formed are no longer valid. It’s also important to remember that these models are designed to study the long-term evolution of the foreign exchange market and are thus ineffective for Forecasting Short-Term Price Behavior. In that case, other tools such as technical analysis and fundamental analysis, which focus on economic indicators that can have an impact in the short and medium-term, should be used instead. (for example, NFP figures, which generally cause a strong and immediate reaction in the financial markets).
Since they are focused on macroeconomic factors that might affect exchange rate flows across countries, the effectiveness of these models stems from the fact that they provide a general understanding of market movements produced over several months or even years.
To the long-term investor, these kinds of models can always be utilized as being an instrument to determine where the market is going and where that will end up in typically the coming months and even years, while intended for the trader targeted on the quicker time frame, they might be utilized to identify the possible standard market trend involving the future.
Trading during news releases necessitates a high level of management and experience. The high amount of volatility allows you to earn quickly, but it also allows you to lose money quickly. To trade the news, use a Low-Leverage Strategy.
During these news announcements, it is usual for brokers to adjust their trading conditions. Make sure your broker doesn’t subject its traders to slippage or widening spreads that cause your stop loss to be hit even if the price doesn’t. When the news is disclosed, the broker may increase the minimum distance required to place a buy stop, sell stop, take profit, or stop loss. Your ability to place an order may be momentarily interrupted.
Generally speaking, No Dealing Desk, ECN and STP Brokers are strongly recommended for trading the news.