Forex fundamental analysis

Forex fundamental analysis is an analysis method that focuses on news events shown in the forex economic calendar.

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Forex fundamental analysis is an analysis method that focuses on news events that you can find on the forex economic calendar. Some of the essential information that you have to analyze is data related to GDP, CPI, PPI, NFP, and how central banks impact the financial markets.

Table of contents:
1. What is a forex economic calendar?
2. Gross Domestic Product (GDP)
3. Consumer Price Index (CPI)
4. Producer Price Index (PPI)
5. Institute for Supply Management (ISM)
6. Non-Farm Payroll (NFP)
7. Role of Central Banks in the forex market

1. What is a forex economic calendar?

A forex economic calendar is a resource where traders can learn about major economies’ critical economic information scheduled to be released. These events can include indicators such as GDP (Gross Domestic Product), CPI (Consumer Price Index), PPI (Producer Price Index), and the NFP (Non-Farm Payroll) report. It can also be helpful to know the date of central bank meetings or news announcements.

Events on the economic calendar are usually filtered by country/region, timezones, and are graded with low/medium/high importance. This rating depends on the likelihood of it impacting the market.

2. Gross Domestic Product (GDP)

GDP economic data is highly significant in the forex market. It is used as an indicator to gauge the overall potential growth of a country. The indicator measures the output and production of finished goods in a country’s economy. Most of the time, it is calculated monthly, quarterly, and annually.

Generally, when looking at GDP data, you are looking if figures are beating or falling below estimates:

  • A lower than projected GDP will usually result in a sell-off of the domestic currency compared to other currencies
  • A higher than projected GDP will usually strengthen the underlying currency versus other currencies

3. Consumer Price Index (CPI)

CPI is an important economic indicator that gets released regularly by major economies to present us with the current growth and inflation levels. Inflation, which is tracked through the CPI, looks specifically at purchasing power and the rise of prices of goods and services in an economy. This can be used to influence a nation’s monetary policy. You can calculate it by averaging price changes of each item in a basket of consumer goods that is predetermined. These include good, energy, and services such as medical care.

CPI is a beneficial indicator for forex traders due to its aforementioned effect on monetary policy and interest rates, directly impacting currency strength.

4. Producer Price Index (PPI)

PPI measures the change in the producers’ price of finished goods and services. It consists of data about the monthly change in the average price of a basket of goods purchased by the manufacturers.

PPI examines three major production areas:

  • Commodity-based companies
  • Industrial-based companies
  • Stage-of-processing based companies

When the PPI index encounters a positive change, it implies that costs are rising, which means that the price increases get passed down to consumers. If the effect is strong enough, CPI figures increase and reflect that the general level of prices has increased.

An increase in the general price level is positive for an economy but only when this is contained. When demands for goods and services increase, businesses are required to increase capital expenditures and hire more workers so they can improve their output to meet higher demand. Problems arise when prices increase drastically, resulting in a decrease in the purchasing power of a country’s currency.

5. Institute for Supply Management (ISM)

The ISM manufacturing index plays an essential role in forex trading since ISM data influences currency prices globally. The ISM manufacturing, construction, and services indicators provide unique opportunities for forex traders that can understand and apply this data to their trading.

ISM measures economic activity from both sides, the manufacturing and service sides. They get released on a monthly basis and include critical information about changes in production levels.

6. Non-Farm Payroll (NFP)

The NFP is an essential economic indicator for the United States economy whose releases create volatility in the forex market. It represents the number of jobs added while excluding farm employees, government employees, private household employees, and employees of nonprofit organizations. The NFP data is typically released every first Friday of the month.

7. Role of Central Banks in the forex market

Central Banks in the forex market are mainly responsible for maintaining inflation. This is due to the interest in sustainable economic growth while contributing to the overall stability of the financial system. They are able to intervene in financial markets under the circumstances defined in the ‘’Monetary Policy Framework’’. Whenever this policy is implemented, it is highly monitored and anticipated by forex traders, who are looking to take advantage of resulting currency movements.

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