Forex analysis is divided into two forms when dealing with trading currencies or other financial instruments – fundamental and technical analysis. They both represent a strong form of analyzing the market. This article would examine the dangers facing forex fundamental analysis.

Fundamental analysis dwells on the general state of the economy, monetary policies, interest rate fluctuations which in a lot of ways affects the economic situations in a country. It makes a lot of sense when investors try to investigate how the market oscillates and how the global economy takes its toll on the financial markets. This can be achieved via fundamental analysis but solely depending on it can be very damaging. Most times by the time we get fundamental news, there are folks out there who have acted on it before us and the resultant of this is shown on the charts.

We find fundamental data most times as being unbalanced as they fail to factor in a whole bunch of information and we find regions wanting to depict that they are doing great in good times and okay during rough times. We can correlate this to a couple of political interference. Hence, it is wise not to be totally confident as fundamental analysis should serve as a guide complementing your technical analysis.

When we get news releases, we find almost all investors getting the same idea of the market and this creates a surge in price actions. You’ll find either everyone in the market saying it’s a buy, a sell or a wait. It is possible for you at this time to join in for some profit making. We still find investors who no matter the odds, would stick to their trading principles (which is what the charts interpret.

A disciplined investor will apply some long-term fundamental analysis alongside trend following technical analysis to develop a firm trade background. We find some short term news like Non-farm payrolls (NFP), produce some knee jerk reactions in the market. This market reaction produces quite a number of false alarms that misleads the investor into thinking theirs a change in market direction.

Being able to solely analyze the market via fundamental analysis would not adequately give you a vivid image of trade decisions to make. It is always advised that technical analysis be added to make the trade decision more accurate. If you remain uncertain about how news can hamper your trade decision, then you should stay off the market during high impact news and wait around for at least a day whist observing the market’s movement.

We have experience all the debate about fundamental and technical analysis and also about which is better. The argument has always been about which of the two types of analysis is better considering the fact that both of them are vital in the currency market.

It is important to stress out that they both stress on the varying areas of analysis. They basically analyze the market in varying ways in that fundamental analysis deals with the global financial market while the technical analysis analyzes charts. This article would stress on economic factors and how they impact currency trading.

Economic Impact

It is easy for anyone who has some beginner forex knowledge to be fully aware of the fact that national economic situations have a vital impact to play on a country’s currency rate. A firm currency is a result of strong economy in the same way we get a listed company’s stock appreciate in value if the firm is doing well.

We get price actions in the market at every instance we get a major financial or economic report coming off a main player in the currency world. Investors find the effects of these reports coming live unto the market seconds after their release. Some of the reports that impact the market from a country are: statement of regional debt, trade deficits and Gross Domestic Product report. The market’s volatility is a measure of frequency of these reports.

As an investor it is wise to get economic reports from not only your country but from other countries whose currency you’re interested in as well Print media reports are not just enough for news update as regards information regarding the market. The forex market is a very fast moving market and I’ll recommend that you rely on the internet for news related figures.

When we consider a country’s economy, we should be aware that such data are not enough in analyzing the market trend. We have some other factors here such as the social and political indices that would also come into play when determining a currency rate. Events such as war, natural disasters, and elections could cumulatively or separately affect the rates of a currency value.

We can hardly predict some of these events; this therefore means that the investor can only analyze them by applying historic analysis in a bid to get what transpired in the market over the last time we had similar occurrence.

Every fundamental currency trader is aware of the importance of financial, political and economic news. Charts in so many ways could interpret price actions for those technical traders, but some of the underlying force for price movement is fundamental data.

What is fundamental Analysis?

Fundamental analysis is assessing a financial instrument based on major economic reports. In currency trading, these economic reports are termed economic indicators. When investors compare the employment numbers from different zones and trade based on the information gathered, this is a clear example of fundamental analysis.

Economic Indicator

An economic indicator is a vital piece of financial data that can be correlated to a financial instrument. Currencies represent the assets of various countries. When considering economic indicators, it is important to look at data such as: Interest Rate decisions, monthly job numbers, Consumer Price Index, and Trade Balance Data.

Fundamental analysis does showcases a number of vital data over time, but at the same time we get data that are important at some instances and at other instances it is less important. A good example is that of a region experiencing firm growth but yet is going through inflation, investors would be looking closely at the Consumer Price Index with hope of high impact.

News Trading

It is a bit tricky when investor’s trade based on fundamental data. We find situation where numbers come out better than expected for a financial instrument but yet we see a slide in its value. This is mainly due to investor’s sentiment in the market. Investors are fond of speculating on an economic release even before the report is scheduled and place bet based on these sentiments.

Having said this, if we get reports that don’t live up to their hype, it won’t really matter if the data comes out good or not, the market would move in the opposite direction as earlier speculators would  exit their positions. For those who wish to trade the news, extreme caution must be employed as trading the news should be left for market participants who have spent several years in the business.

Summary

You can better understand the currency market or any other market out there via fundamental analysis. Meanwhile, results are not always straight forward, as they seem backward sometimes. Overtime, currencies would always go in the direction of fundamental data. Getting a firm grasp of fundamental analysis would help any investor out there better understand the main reason behind trends and also price actions.

There’s need to point out here the fact that investors rely on either technical or fundamental analysis when trading in the financial markets. Technical analysis tends to view price as a perfect reflection of all the news happening in the market, with charts as objects of such analysis.

When investors look keenly at the intricate value of an investment (fundamental analysis), its application in the currency market has to deal with the economic conditions that affects the currency of the nation. At this point we’ll discuss some of the primary fundamental indices that affect currency price action.

Economic Indicators

Economic indicators are reports that we find corporate firms or government release that contains in-depth performance of the country’s economic health. It is possible to determine the economic wellbeing of country by employing these economic indicators. It is important to note that a whole lot of factors and policies can influence a nation’s economics.

We find these reports being released periodically; giving the market a jump-start on if the country’s economy has made gains. These reports do impact the market and affects earnings reports, just as we find reports like SEC filings affect securities. In the currency market just like we get in stocks trading, minute deviations could result into huge price actions and volume movements.

It is possible to know about some of these economic data, an example is the unemployment numbers, which is well publicized. We have a host of others like housing stats, which get very little coverage. At the same time, we should be aware of the fact that these economic indicators impact the market differently. Those with high impact on the market get a lot of attention from investors as they attract huge moves in price action.

Fundamental analysis does not in any way signify news trading, nor does it preach timing of the markets. While we find it occur in the market a couple of times, it is rare that the dictates of fundamental analysis will be sown in price actions immediately. We get extreme correction in price when we find the market realigning itself to fundamental data. There’s an elimination of fundamental analysis from price action when we get irrationalities and as well accompanied by huge profits.

Conclusion

From the earliest of times of the invention of foreign exchange, fundamental analysis has given the investor so much to smile about. We have seen the Chinese merchants of the Warring States periods, antiquity speculators, military contractors of the roman era and well known instances today like Warren Buffet and George Soros who have all been able to utilize the strength of fundamental analysis in wealth acquisition beyond what some investors who clanged to technical studies could imagine. As a matter of fact you can make up your mind and join the bang wagon today, as the tools required for currency trading are available and open to all who so desire them.

Equities soared for the 3rd straight day after the  Chicago PMI for June came in at 61.1, up from 56.6 in May and substantially above the consensus forecast of 54. The Chicago PMI has a reputation of being a precursor the National Association for Purchasing Management’s read on factory activity (the ISM), which is to be released Friday morning.  The strong PMI numbers follow a solid Japanese Industrial Production , making some believe that manufacturing only dipped during May.

The most widely discussed format for the agreement on Greek debt rollovers has been modeled after the discussions taken place with French banks. Under this plan, financial institutions would rollover 50% of the proceeds from bonds maturing between 2011 and 2013 into 30-year Greek bonds. The new bonds would have a coupon of around 5.5% plus a possible GDP warrant worth up to 2.5%. Bond holders would invest an additional 20% of the proceeds in a special purpose vehicle (SPV) holding newly issued Greek bonds. By doing so, they would hold equity in this SPV instead of outright Greek debt on their balance sheets.

The latest inflation figures have offered little respite with respect to the near-term UK inflation trend.  The May CPI matched market expectations, staying at 4.5%YoY, after climbing to the highest since Oct 08 in the previous month. The driver came predominantly from a 1.2%MoM surge in food prices as the lagged effects of the rise in agricultural commodities fed through. This offset the effects of a weaker core CPI and lower fuel prices. Core CPI fell back to 3.3%YoY from 3.7%YoY, unwinding almost all of the previous month’s 0.5% jump in the annual rate, although disappointingly the Easter effects on transportation – a 29%MoM jump in airfares in April – was only partially reversed in May.

The EU/IMF/ECB completed their mission in Greece and approved the next aid installment in early July. In the statement, the troika said that “the government has committed to an ambitious medium-term fiscal strategy, reinvigoration of fiscal and broader structural reforms is necessary to further reduce the deficit and achieve the critical mass of reforms needed to improve the business climate and pave the way for sustainable economic recovery”. On privatizations, the government will create an independently managed privatization agency with the aim of realizing revenues of €50bn by the end of 2015. Meanwhile estimates of the new aid package for Greece are in the range of €100bn in order to meet Greece’s financing needs in 2013 and 2014.

German Chancellor Merkel yesterday ruled out any sort of change in Greece’s debt structure before 2013 could signal a change in stance.  Many Germans officials were recently and openly talking about restructuring.  Now, perhaps Merkel is clamping down on this with the hopes that taking the Greece restructuring option off the table may reduce market stresses and improve Spain’s chances of dodging the bullet.  In other words, back to kicking the can down the road.  Recent frank talk about restructuring spooked markets.  If the restructuring fears ebb near-term, the can is kicked again, and Spain avoids pressure, then this would be euro-positive.

The Global oil market urgently needs extra supplies to prevent economic damage to importing countries that could derail the global recovery, the governing board of the International Energy Agency during the past week.  OPEC will meet in early June to discuss its production ceiling, but officials at several member countries have said that a production increase is unlikely to be on the agenda.  The IEA said it wants to work in a constructive spirit with oil producers, but added that it is, “prepared to consider using all tools that are at the disposal of IEA member countries.”  With Oil prices already taking a tole creating gasoline prices near $4 dollar a barrel in the US, the EIA could release publically held stocks from the petroleum reserve.