October 2, 2013

Forex Strategies Using Fundamental Analysis

Forex and CPI

Forex traders often take one of two views of the trading market.  They either base their view on technicals, or they maintain a fundamental view.  Both these types of forex strategies have allowed traders to gain profits in this market.

The fundamental forex strategies use a broad range of financial and economic data to determine the future value of a currency.  To use this method effectively, it is necessary for you to remain up to date on economic and political conditions in the countries related to your currency pair.  Any fluctuation in the data you have at hand could cause the currency to rise or fall.

Interest Rates

The changes in interest rates can affect currency values over the long-term.  Central banks generally release monthly announcements regarding the interest rates and this is a vital report to be aware of.  The rates are at times manipulated by the central bank in an attempt to control its money supply.  When the bank makes the decision to increase its money supply, it will normally decrease its interest rates.  The opposite is true if they wish to decrease the money supply, they will simply increase the relevant interest rates.

Consumer Price Index

Countries require a high level of consumerism for it to maintain a healthy economic climate.  If this level of demand remains high, the country’s economy will grow.  If the demand declines, the economic health of the country will decline.  This normally occurs when there is a high level of unemployment.  If consumers do not have jobs, they do not earn money to spend.  This causes an economic decline which, in turn, ultimately is the cause of businesses closing their doors.  This is a very difficult cycle to overcome as the wheel that goes round consists of unemployment causing less spending which causes businesses to close down, causing more unemployment.  This cycle of events requires government intervention to try and stop the damage to the economic climate of the country.

Gross Domestic Product

The GDP of a country is a suitable indicator of the economic health of a country.  The government usually determines an annual growth expectancy to allow the country’s economic health to grow.  In the event that the gross domestic product does not meet this budgeted level, the currency value of the country will decline.  In the event that the GDP exceeds the expected level, it will provide the currency value with a boost.

Effect of Inflation on Fundamental Forex Strategies

Inflation and the economy are always on opposite sides.  High inflation levels murder the purchasing power of a currency.  Most countries target an inflation rate of between two and three percent.  When the target that is set by the government is exceeded, the currency will rise in value as an imminent interest rate hike is in the offing.  It has been proven that high interest rates fight rising inflation rates.

Unemployment Levels

The citizens of a country drive its economic growth.  This makes the level of employment in a country a vital factor when assessing the country’s economic health.  Countries with high unemployment levels will have limited economic growth.  When the levels of unemployment increase, it is indicative of a decrease in the labour and industrial markets.  When this occurs over an extended period of time, central banks often step in by boosting the supply of money in an attempt to boost the economy.

These factors are very important to a trader who wishes to adopt the fundamental forex strategies in trading.



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