Lesson 1: A Deeper Look to Fundamental Analysis

One main way to profit from the forex market is to speculate on its movement. Here, you're forecasting the direction the market could take. 

When analyzing the market using the fundamentals, one way to determine the potential market movement is through external market indicators like economic data, political data, and even social factors headlines. You look at these fundamentals of the currencies you're trading to perceive the potential asset movement.  

Lesson Highlights

• Analyzing the market fundamentals is an important skill forex traders must master. Fundamental analysis factors in the market extremes like economic indicators, political events, geopolitical conflicts, unplanned events like catastrophes.
• Social analysis involves factoring industry personalities, influencers, and anyone who has social media clout that can impact the forex market.

Deeper Look at Fundamental Analysis 

When you trade forex, you basically look at the supply and demand of the currency exchange rate. Sounds easy, right?  

Well, the hard part here is analyzing every possible factor that significantly affects the supply and demand of the market. These fundamental factors have many forms, such as;  

Each of these fundamental data drives up the market movement. With economic and political indicators, you can easily gauge these fundamentals using an economic calendar.  

Remember, data in the economic calendar is readily available online (economic reports, political events, etc.) This way, you'll have a reference for events that surely move the market.  

For geopolitical events and unplanned fundamentals, you must always be on the lookout for news releases. News headlines will give you an idea about the market events that are currently happening. It's best to act promptly with these fundamentals to avoid getting surprises from the market.  

When trading forex, having a feel for the market is essential for speculating the possible price direction. Upon considering the general attitude of traders in the specific market, you can soundly tell that the market will be bullish if market sentiment is positive. Likewise, it'll be bearish if the sentiment turns out negative.  

Economic Indicators 

Trading forex involves trading currencies, right? We all know that the currency is tightly knitted to the economy of the currency's host country.  

The idea is that the currency will strengthen when the economic indicator turns positive. Likewise, if the indicator is negative, the currency will weaken. 

Why? Because the better the economic health of the country, the bigger its investors are. Consequently, this translates to value appreciation of its currency. 

Here are the common economic indicators you can closely monitor to stay atop the market.  

1. Inflation Data 

Inflation data gives the idea that the economy's goods and services are experiencing a price hike over time. But how do you assess the inflation data of one's country? Well, you look at the key inflation indicators;  

• Consumer Price Index (CPI) 
• Producer Price Index (PPI) 

High inflation erodes purchasing power, affects interest rates, and influences central bank monetary policy decisions. Central banks often aim to maintain stable and moderate inflation rates to support economic growth and stability. 

Note: A high inflation rate translates to a weakening economy, which leads to currency depreciation.  

2. Employment Data 

The labor market condition of a country is also an essential fundamental indicator. Here, you're looking at indicators like; 

• Unemployment rate 
• Nonfarm payrolls 
• Jobless claims 

Low unemployment rates and strong job creation indicate a healthy labor market. A healthy labor market can contribute to consumer spending, economic growth, and overall economic confidence. 

Meanwhile, high unemployment rates or rising jobless claims may signal economic weakness. This labor condition impacts consumer sentiment and spending patterns, which may be negative. 

3. Gross Domestic Product (GDP) 

Gross Domestic Product is a key fundamental indicator; it has a huge effect on the market movement because of its economic importance. GDP is a measurement that shows the country’s economic performance. It represents the total number of all goods and services produced within the country over a period. 

GDP growth is a critical indicator of economic health and is often used to assess the pace of economic expansion or contraction.  

Fundamental traders closely monitor GDP data. This way, they can properly evaluate an economy's overall strength, identify economic activity trends, and make informed market decisions. 

Note: These reports are typically published quarterly or annually. Make sure to be updated with these reports to ensure you're riding the market volatility.  

Political Indicators 

Market fundamentals are more than just economic factors; they also involve close monitoring of political indicators that happen in the currency's host country. 

These political indicators can be positive or negative, driving market sentiment towards the currency. 

Like economic indicators, a positive market response often leads to an appreciation of a currency's value because the market tends to be in demand. Likewise, a negative response translates to less demand because the trader will be cautious about entering the market. 

1. Geopolitical Conflicts 

International conflicts that may lead to war and trade disputes are also a strong market indicator. Why? This creates uncertainty and volatility, driving the market to snap.  

Fundamental traders look closely at the geopolitics indicators to assess the potential market movement. This includes geopolitical risks and their possible impact on global trade, commodity prices, currency exchange rates, and market confidence. 

Note: Fundamental indicators like these depend highly on market sentiment or traders' perception of geopolitical conflicts.  

2. Political Stability 

Political stability is another market indicator that drives up market sentiment. This fundamental indicator suggests the economic performance of the country.  

A stable political scene suggests a growing economy and expanding investment, which leads to a stronger currency. Meanwhile, unstable politics may weaken the currency value, leading to market depreciation if you use the currency as the base in the pair.   

When factoring the political stability, here are key indicators you can look at;  

• Establishment of a democratic institution 
• Election frequency 
• National protests 
• Political turmoil or conflict 

3. Election Cycles 

When there's an upcoming election, you can expect the currency value of the respective country to snap. This is because an election means potential policy transition, which creates an area of uncertainty in the market. 

Like any political indicator, market sentiments are an essential factor for market movement due to the election cycle. If the election seems to have a positive response from investors, you can expect market appreciation. If not, the market is likely to decline due to negative response.  

To do this, you must closely monitor election cycles, campaign promises, and potential policy changes to anticipate their impact on the economy and how investors may perceive it. 

Social Factors 

Fundamental analysts do not only rely on economic and political data for the potential price. Industry personalities, influencers, and anyone who has social media clout can also affect the market movement. 

Remember how the Dogecoin skyrockets after Elon Musk, a famous financial personality, tweeted about it? This shows that industry giants can cause market fluctuation because of the significant impact they possess. 

For the next lesson, you'll learn how the country's interest rate can be important data for fundamental analysts.