At its simplest, fundamental analysis attempts to measure and judge the health and outlook for an economy. Stronger growth should underpin a strong currency, while weaker growth would indicate a weaker currency. It is important to watch for shifts in the trend, but in the context of what a currency already is reflecting and how this compares with other economies (relative growth).
Official economic releases are reliable and regular indicators of the state of play in an economy and many private sector releases are also useful to follow. All major economies release data on the key parts of the economy, coming together with the release of the National Accounts (or GDP).
Major releases watched by currency markets include:
• GDP
• Industrial production / durable goods order / Institute of Purchasing managers (both manufacturing and non-manufacturing)
• Retail sales / private income and spending / consumer confidence
• Employment , unemployment and wages
• Trade data, imports and exports and the current account
• Home sales, house prices, housing finance, construction spending
• Survey data such as business and consumer confidence, and data such as the US Federal Reserve's Beige Book (which assesses various anecdotal indicators of economic activity)
• Inflation indicators - such as Consumer Price Index, Producer Price Index, import and export prices, and inflation expectations
Economic calendars are a critical guide to approaching data that could impact currency markets.
The influence of any particular indicator will depend on what issues investors are currently focused on, and this changes frequently. For example, if inflation is the concern then inflation indicators will be key, whereas if the market is worried about the state of housing -as is currently the case in the US - then the focus will be on housing data.
In addition to assessing the trends in these indicators, investors must also look at how each piece of data relates to expectations. Remember, expectations are a critical part of financial market trading. Thus a currency could strengthen even if a piece of data that shows a weakening trend but still beat expectations (and vice versa). In a similar vein, rumours can also impact currency markets.
Follow these links to learn more about FX Trading.
What is Forex? How an FX trade Works Calculating Profit and Loss in Leveraged Trading Other Key Concepts in Currency trading
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