Explore Financial Market: Fundamental Analysis and Economic Indicators

Both technical analysis and fundamental analysis are advanced approaches to predicting price movement, enabling you to predict short-term and long-term price changes, respectively.

Fundamental analysis in forex trading involves evaluating and analyzing the economic, financial, geopolitical factors that can influence the value of a currency. It involves interpretation of statistical reports and economic indicators.

An Economic Calendar is a tool that provides scheduled dates and times for the release of important economic reports and indicators. Analysts use this calendar to assess the potential impact of these news releases on financial markets. Additionally, it often includes expert forecasts for the data that will be announced. This information is crucial for traders to make informed decisions based on economic events and their expected outcomes.

Central Bank and Interest Rates

The central bank plays an important role as it is a key institution that influences a country’s monetary policy and economic stability. They are tasked with managing inflation, money supply, and interest rates, as well as supervising commercial banking systems.

Currency Reserves

Central banks operate with the largest trading volumes and have the greatest impact on currency rates. They can influence their currency’s value by buying or selling it in the foreign exchange market. For instance, buying the domestic currency and holding it in its reserves to increase its value while selling it can decrease its value.

Interest Rate Policy

Central banks regularly announce changes in their benchmark interest rates. It is also a tool to control economic conditions. For example, higher interest rates typically can attract foreign capital seeking better returns, leading to an appreciation of the country's currency. Conversely, lower interest rates may discourage foreign investment and result in a depreciation of the currency. These decisions are closely monitored by traders because they can affect the attractiveness of a country’s currency.

Hawkish or Dovish Policies

The terms ‘hawkish’ and ‘dovish’ are commonly used to describe a central bank’s policy stance. A ‘hawkish’ central bank is more concerned about controlling inflation and may raise interest rates to achieve that goal. In contrast, a ‘dovish’ central bank is more focused on promoting economic growth and may lower interest rates to stimulate economic activity.

Inflation

Inflation serves as a critical economic indicator that measures the rate at which the general level of prices for goods and services is rising within an economy. It has a direct impact on the supply and demand for a currency, which in turn affects its exchange rate. The major inflation indicators are:

Consumer Price Index (CPI)

The CPI measures the average change in the prices paid by urban consumers for a market basket of consumer goods and services, including food, housing, clothing, transportation and medical care. It is one of the most widely used indicators to track inflation in an economy.

For example, when the price for these items increase, it causes the CPI to rise, indicating inflation. Conversely, when prices decrease, it causes the CPI to fall, indicating deflation. In other words, CPI shows how consumer buying power has changed and how it was affected by inflation.

Usually, CPI data is published on a monthly basis, typically around the middle of the month, at 20:30 UTC+8.

Producers Price Index (PPI)

The PPI measures the average change in selling prices received by domestic producers for their output, which include raw materials, intermediate goods, and final products. It can provide insights into potential future changes in consumer prices.

For instance, when PPI shows an increase in the price’s producers receive for their inputs, it can lead to cost-push inflation. Producers may pass on these higher input costs to consumers by raising the prices of their final products, contributing to consumer inflation.

Besides, changes in PPI can signal disruption in the supply chain, such as rising transportation costs, increased prices for energy and commodities. These supply chain pressures can impact the prices of both intermediate and final goods, affecting inflation.

Usually, PPI data is published on a monthly basis, typically around the second or third week of the month, at 20:30 UTC+8.

Gross Domestic Product (GDP)

The GDP measures the total value of all goods and services produced within a country’s borders during a specific period, typically a quarter or a year. It is often used to gauge the overall economic health and performance of an economy. GDP and inflation are closely related economic indicators. Their relationship is complex, in which GDP can influence inflation and inflation can affect GDP.

For example, when GDP grows at a faster rate than the economy’s capacity to produce goods and services, it can lead to upward pressure on price. This occurs because increased demand for goods and services can result in businesses raising their prices in response to the higher demand. Hence, rising GDP can also contribute to demand-pull inflation.

Other Indicators: Wage Growth, Commodity Prices

When wages increase, it directly impacts a significant portion of a business’s operation costs. Since labour is a fundamental input in the production of goods and services. Hence, when labour costs rise, businesses might face increased expenses. In response to higher labour costs, businesses often try to maintain their profit margin. One way to do this is by passing on these increased costs to consumers through higher prices for goods and services, thus leading to inflation.

Moreover, the prices of commodities such as oil, metals and agricultural products can have a significant impact on inflation, especially in economies heavily reliant on these resources. Commodity prices are influenced by global supply and demand dynamics. Natural disasters, and geopolitical tensions can disrupt the supply chain and impact commodity prices. These fluctuations in commodity prices, when significant, can lead to volatility in inflation rates.

You can gain further insights into the forex market by reading the article here.