Fundamental analysis is the interpretation of political, economic, and social factors which may have an impact on a country’s economy, subsequently affecting the value of its currency.
Generally speaking, the health of a country’s economy reflects in the value of its currency and a healthy economy will tend to have a stronger currency in relation to that of a country that is not performing so well.
There are many forms of economic data and statistical reports released on a periodic basis which can be used by investors to help gauge the health of an economy and therefore potentially influence the value of its currency. The economic calendar listing these reports is available here on our website.
Most popular and commonly focused economic reports
Gross Domestic Product
Gross Domestic Product (GDP) is the total value of goods and services produced by a country. Measured over a specific period of time it is one of the broadest measurements of economic activity and a primary indicator of economic health. An increase in a countries GDP will show growth and development within its economy.
Trade Balance measures the difference in value between imported and exported goods and services of a country over a specific period. A positive number indicates that more goods were exported than imported (a trade surplus), whereas a negative number indicates that more goods and services were imported than exported (a trade deficit).
Retail Sales is a primary indicator used to measure spending on goods and services provided by the retail industry by consumers and businesses. Used to help gauge the health of an economy, retail sales account for more than 70% of the United States GDP.
Employment change measures the variation in the number of employed people within a specified time frame. Consumer spending is directly linked to employment levels as people currently employed tend to be more inclined to spend than those who are not.
Consumer Price Index
Consumer Price Index (CPI) measures the average change in the value of a fixed set of consumer goods and services. With more than 200 categories, included within this basket of goods are food and drink, household costs, transportation, education and medical care fees. Frequently used to identify periods of inflation and deflation, the basket of goods is periodically reviewed to consider for changes in consumer spending habits.
Producer Price Index
Producer Price Index (PPI) measures the average change in value of finished goods and services sold by producers and is a leading indicator for inflation. Increases in the costs for producers’ goods and services will usually be passed down to the consumer which can therefore increase the Consumer Price Index.
Interest rates are defined as the rate at which banks borrow funds from that country’s central bank. Used by Governments as a monetary policy tool, interest rates will often be reduced during times of economic contraction to help support borrowing and increased during times of economic expansion to support saving. During times of recession or depression, the lowering of interest rates is used in tandem with other monetary and fiscal tools such as increases in government spending and the lowering taxes.
Because fundamental analysis includes a wide array of factors which can influence a country’s economy, it can require quite some time to be mastered. To facilitate the process of understanding fundamentals, Traders Trust provides an economic calendar which describes each economic indicator and how they can influence a currency’s value, along with renowned analysts’ forecasts.
To stay informed with the data released in the important economic reports, be sure to check out the economic calendar on our website here. If you would like to incorporate fundamental analysis to help make informed trading decisions, why not open a demo account and begin trading risk free.