Fundamental analysis is the process by which you try to determine the underlying value by making predictions based on available data and statistics. In this article we look at several important economic indicators that play a role in fundamental analysis.
Gross national product (GNP)
The GNP is the total added value of a country or economic zone. The added value is determined by adding the total market value of all goods and services within a certain region. That way you have a nice picture of the economic health of a country.
GNP indicates what has happened within a zone in the past period. It is therefore wise to focus primarily on the preliminary predictions that usually come out a month before the final figures. If the final figures ultimately deviate from the provisional reports, this will cause the price to move significantly.
Consumer price index (CPI)
The CPI indicates the price development of goods and services within a given country. The consumer price index is determined by studying the price developments of a basket of goods and services purchased by an average household within the country or zone.
The CPI can be used to make predictions about interest rates . A high CPI is an indication of the presence of strong inflation with rising interest rates as a result. By achieving a higher return on currency with a high interest rate, the demand for that currency will increase, which will drive up the price.
Employment is extremely important for stability within a zone. When one works, one has more money to spend so that production is maintained. In the event of high unemployment, many people have little to spend, as a result of which the overall production will fall further: the zone will then end up in a downturn. A high unemployment rate obviously has a negative effect on the price of the currency in question.
The retail sales figures come out every month. Because season correction has been applied, this is a very strong indicator of the power of consumer spending. By interpreting the retail sales figures correctly, it is possible to predict other delayed indicators such as the GNP and the CPI.This indicator can therefore be used well to estimate the future direction of the economy.
Balance of payment
The balance of payments gives an overview of all imports and exports with other countries. There is a surplus when there is more export than import, there is more demand for the currency of the zone which will cause the price to rise. When there is a shortage, however, more is imported than is exported, the price will decrease because there is more demand for other currencies and less for the currency of the own zone.
Tax and monetary policy of the government
By manipulating various economic instruments (tax legislation, interest rates and import tariffs), the government can try to maintain stability within its own zone. Many measures taken by the government have a major influence on the exchange rate of the currency. For example, if the government makes borrowing tax-unattractive, foreign companies will invest less within the country, causing the demand for the currency and hence the price to fall.
The interest rate as determined by the central bank within a zone (eg ECB, FED) has a major impact on the demand for certain currencies. When the interest rate rises, money yields more and the demand for the currency in question will increase. By taking into account the different economic indicators it is possible to predict what the central bank will do. In the event of a high inflation rate, the central bank will, for example, increase the interest rate to stop spending.
Apply fundamental analysis
When you start trading in Forex on the basis of fundamental analysis, it is important that you know how the economy is structured globally. When you know how the various indicators are connected, you can make predictions and thus greatly increase the chance of a successful trade.
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