"Fundamental Analysis in Forex”
Fundamental Analysis in Forex
➢ What is Fundamental Analysis?
➢ Types of News in Forex
➢ Important News Events in Forex
➢ How to Read and Interpret News
➢ News Trading Strategies
What is Fundamental Analysis?
❑ Definition: Fundamental analysis in forex focuses on evaluating a country's economic health and
forecasting the direction of its currency based on macroeconomic indicators and geopolitical
events.
❑ Key Factors: It considers factors like interest rates, inflation, employment, GDP growth, and
political stability.
❑ Purpose: To identify long-term trends in the forex market and make informed trading decisions.
❑ Long-Term View: Unlike technical analysis, fundamental analysis looks at broader market forces
rather than short-term price action.
Why is Fundamental Analysis Important?
• Understanding Market Drivers: Helps traders understand what drives currency price
movements.
• Informed Decision-Making: Provides the foundation for long-term investment decisions.
• Risk Management: Helps mitigate risk by providing clarity on major economic events and
potential volatility.
• Market Sentiment: Plays a key role in forecasting and predicting currency movements based
on market sentiment and economic data.
• Example: Explain how higher interest rates in a country can strengthen its currency by attracting foreign capital.
Types of News in Forex
• Economic News: Reports like GDP, unemployment, inflation (CPI), and retail sales.
• Central Bank Announcements: Decisions on interest rates, monetary policies, quantitative
easing (e.g., Federal Reserve, ECB, Bank of Japan).
• Political News: Elections, policy changes, trade deals, or political instability.
• Unexpected Events: Natural disasters, geopolitical tensions (e.g., war, pandemics).
• Corporate and Trade Data: Major corporations’ earnings reports and trade deficits.
• Example: Illustrate how central bank decisions can cause major price fluctuations in currency pairs.
Importance of Understanding News Types
❑ Economic News: Influences a country's economic strength and overall currency value.
❑ Central Bank Decisions: Central banks directly control monetary policy, which can significantly
impact interest rates and inflation.
❑ Political News: Major political changes (e.g., elections or trade agreements) often lead to large
currency movements.
❑ Unexpected Events: These events can create sudden volatility, and it's essential to understand
their implications.
❑ Example: Show a case where geopolitical tensions lead to safe-haven currency appreciation
(e.g., Japanese Yen or Swiss Franc during a crisis).
How to Read and Interpret News
• Focus on Key Indicators: Always check forecast vs. actual numbers (e.g., If GDP growth beats
expectations, the currency might strengthen).
• Market Expectations: Anticipate how traders are positioning before the news.
• Time of Release: Be aware of scheduled news releases and the time zone differences.
• Market Sentiment: Understand how sentiment can drive short-term movements.
• Immediate Market Reaction: Often volatile, wait for a clear trend after the release before entering
trades.
• Example: Explain a scenario where the U.S. interest rate rises unexpectedly, causing the USD to rally.
Important News Events in Forex
• Non-Farm Payrolls (NFP)
• Interest Rate Decisions
• Gross Domestic Product (GDP)
• Consumer Price Index (CPI)
• Producer Price Index (PPI)
Important News Events in Forex
• Non-Farm Payrolls (NFP): Released monthly, measures U.S. employment levels and is highly impactful.
• Interest Rate Decisions: Central banks’ rate changes affect borrowing costs and capital flows.
• Gross Domestic Product (GDP): Measures overall economic growth and gives a clear picture of a
country's health.
• Inflation Reports: Includes Consumer Price Index (CPI) and Producer Price Index (PPI), critical for
understanding the purchasing power and inflationary pressures.
• Trade Balance Reports: Shows the difference between a country's exports and imports, affecting
currency demand.
• Example: Display a calendar of the month’s major economic reports, highlighting events like the NFP and ECB interest rate decisions.
Non-Farm Payrolls (NFP)
• Definition: The NFP report shows the total number of paid U.S. workers excluding those in the farming
industry, government, private households, and non-profit organizations.
• Released by: The U.S. Bureau of Labor Statistics (BLS) on the first Friday of every month.
• Importance: It is one of the most important indicators for understanding the strength of the U.S.
economy.
• Impact on Forex: A higher-than-expected NFP figure generally strengthens the U.S. Dollar (USD), while a
lower figure weakens it.
• Market Volatility: NFP reports are often accompanied by high market volatility.
• Example of NFP Impact on Forex Markets
• Positive NFP Report: If the NFP data is better than expected, the U.S. Dollar tends to strengthen.
• Negative NFP Report: If the data is worse than expected, the U.S. Dollar often weakens.
• Example: When the NFP report showed a significant increase in job creation, the USD/JPY currency pair
rose sharply.
Interest Rate Decisions
• Definition: Central banks decide interest rates to control inflation, encourage spending or
saving, and manage the overall economic stability of a country.
• Central Banks: Major central banks include the Federal Reserve (U.S.), European Central Bank
(ECB), Bank of England (BoE), and Bank of Japan (BoJ).
• Direct Impact on Currency: Higher interest rates generally attract foreign investment, increasing
demand for the domestic currency.
• Volatility in the Forex Market: Interest rate decisions and any statements about future rate hikes
or cuts are among the most volatile events in forex.
• Hawkish vs. Dovish Statements: A hawkish stance signals higher rates (currency appreciation),
while a dovish stance signals lower rates (currency depreciation).
• Interest Rate Impact on Forex Markets
• Example: After the Federal Reserve announced a rate hike, the USD/CHF pair appreciated as
investors shifted into the higher-yielding U.S. Dollar.
• Market Reaction: The currency markets often react quickly to interest rate changes, but
sometimes the bigger movement comes from the guidance given by central bank officials about
future rates.
Gross Domestic Product (GDP)
• Definition: GDP measures the total value of all goods and services produced by a country over a
specific period, usually quarterly.
• Released by: National statistical agencies, such as the Bureau of Economic Analysis (BEA) in the U.S.
• Importance in Forex: Strong GDP growth indicates a healthy economy, typically leading to a stronger
currency. Weak GDP growth signals economic trouble and may weaken the currency.
• Leading Indicator: A key measure to assess the overall health of an economy.
• Forex Impact: Higher-than-expected GDP growth boosts currency demand, while weaker-than-
expected figures can cause a sell-off.
• Example of GDP Impact on Forex Markets
• Example: If the U.S. GDP unexpectedly beats expectations with strong growth, the USD will typically
rise in value against other major currencies.
• Scenario: During a strong GDP report for the U.S., the EUR/USD pair might fall as the USD strengthens.
Consumer Price Index (CPI)
• Definition: The Consumer Price Index measures the average price change over time of a basket of goods
and services purchased by households, often used as a primary indicator of inflation.
• Released by: National statistical agencies such as the U.S. Bureau of Labor Statistics or Eurostat.
• Inflation Indicator: CPI is a crucial measure of inflation, which directly affects monetary policy decisions,
particularly interest rates.
• Forex Impact: Higher CPI numbers suggest rising inflation, which can lead to interest rate hikes by central
banks, boosting the currency’s value. Lower CPI signals low inflation and may lead to rate cuts, weakening
the currency.
• Core CPI: Often excludes volatile items like food and energy to give a clearer picture of underlying inflation
trends.
• Example of CPI Impact on Forex Markets
• Example: A spike in U.S. CPI could signal rising inflation, increasing the likelihood of a rate hike by the
Federal Reserve. This would generally cause the USD to appreciate against other currencies.
• Scenario: If CPI data is much higher than expected, the market might quickly price in future rate hikes,
causing a jump in the USD/JPY or USD/CHF pairs.
Producer Price Index (PPI)
• Definition: The Producer Price Index measures the average change over time in the selling prices received
by domestic producers for their output. It’s an indicator of inflation from the perspective of producers.
• Released by: National agencies like the Bureau of Labor Statistics (U.S.).
• Importance: PPI is a leading indicator of consumer inflation (CPI). Rising producer prices are often passed
on to consumers in the form of higher retail prices.
• Forex Impact: A high PPI may lead to increased inflation expectations, prompting central banks to raise
interest rates. This can strengthen the currency. A low PPI could signal weakening inflationary pressure,
which may weaken the currency.
• Leading Indicator: PPI is often used to predict future movements in CPI.
• Example of PPI Impact on Forex Markets
• Example: If the U.S. PPI rises unexpectedly, it could indicate that inflationary pressures are growing,
leading the Fed to raise interest rates. This would typically cause the USD to strengthen.
• Scenario: Following a higher-than-expected PPI release, the GBP/USD pair might drop as investors
anticipate tighter U.S. monetary policy.
Step-by-Step Approach to Interpreting News
• Step 1: Identify the news event and its time of release.
• Step 2: Look at the forecast and compare it to previous results.
• Step 3: Analyze market sentiment and pre-positioning by traders.
• Step 4: Watch the immediate reaction, but wait for confirmation before making a trade.
• Step 5: Analyze long-term implications and adjust trading strategy accordingly.
News Trading Strategies Overview
• Pre-News Trading: Positioning before the news based on expected outcomes.
• Post-News Trading: Waiting for the market’s initial reaction and trading based on
confirmation of the trend.
• Straddle Strategy: Placing both buy-stop and sell-stop orders to catch any major breakout
after the news.
• Range Breakout: Trading based on a range break, which often occurs following major news
releases.
Pre-News Trading Strategy
• Entering Early: Take positions based on anticipated news outcomes.
• Low Risk, High Reward: If the news outcome is expected and correctly predicted, you can
capture significant movement.
• Risk: If news doesn’t match expectations, positions can be highly volatile.
• Example: Entering a long trade on USD/JPY ahead of a positive U.S. GDP report.
Post-News Trading Strategy
• Wait for Reaction: Avoid the immediate market volatility and enter a trade after the
news is released.
• Confirmation: Wait for confirmation of a price direction before entering a trade.
• Example: After an unexpected rate hike by the Federal Reserve, you wait for USD to
confirm an uptrend before entering long trades.
Straddle Strategy
• Setting Pending Orders: Place buy-stop and sell-stop orders before the news release to
capture any breakout.
• Minimizing Risk: Both orders allow you to participate in either direction of movement.
• Example: Before the NFP report, place a buy-stop 50 pips above and a sell-stop 50 pips below
the current price.
Risk Management in News Trading
• Use Stop-Losses: Always use stop-losses, as news volatility can be unpredictable.
• Limit Leverage: News can create rapid movements; high leverage can wipe out accounts.
• Slippage: Be aware of slippage, especially during highly volatile news releases.
• Stay Informed: Monitor not only major news but also unexpected announcements that can shift
markets.
