10 Most Important Fundamental Indicators in Forex
The forex market is all about currency, and the value of a currency depends on the country’s economy. So naturally, changes in the economic state of the country will have an impact on the currency.
Fundamental indicators in forex cause significant movement in currency value. Many traders watch these events to predict the market and make buying and selling decisions accordingly.
However, understanding what impacts a particular economic event makes is difficult. But do not worry; this article will discuss the top Forex fundamental indicators and their impact. Before that, let us have a quick overview of fundamental analysis.
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In the Forex market, Fundamental analysis deals with examining the economic, social, and geopolitical conditions that directly or indirectly affect the currency pair value.
A stronger GDP data than expected will be positive for the currency, indicating bullishness. Meanwhile, weaker data for the currency will be negative, indicating bearishness.
Inflation is the most important fundamental forex indicator that significantly impacts trading. High inflation means lower purchasing power and weakness in the currency. Meanwhile, low inflation means high purchasing power and strength in the currency.
Non-farm payroll is an employment fundamental indicator. It represents the total number of paid workers in the USA, excluding nonprofit organizations, private households, and farms.
The Federal Open Market Committee (FOMC) consists of Twelve Authorities from the USA, including the FED chairman. These people meet eight times a year to discuss the US financial condition.
An Introduction to Forex Fundamental Analysis
In the Forex market, Fundamental analysis deals with examining the economic, social, and geopolitical conditions that directly or indirectly affect the currency pair value.
For example, news has surfaced that Japan’s service sector is expected to see massive growth in the upcoming years. Now, this news will have a positive impact on Japan’s currency, and as a result, the bullish sentiment for Japanese Yen will increase in the market.
Or, suppose a news article surfaced that a huge flood occurred in Japan. It means that it will have a negative impact on Japan’s economy. As a result, bearish sentiment for Yen will increase.
Top 10 Fundamental indicators in forex
Fundamental analysis is all about studying economic, political, and social events. However, from this perspective, the number of such events is numerous.
And keeping an eye on all such events is not possible. Therefore, here is a list of major forex indicators that are must-watch:
Gross Domestic Product
Gross Domestic Product is the total value of all the goods and services that throw light on the country’s economic health. GDP is a forex indicator that tracks a country’s performance compared to others.
Simply put, GDP includes all the spending and output of private and public sectors. The data is generally reported every quarter. One can make both short-term and long-term forex trading decisions by watching this data.
Impact
A stronger GDP data than expected will be positive for the currency, indicating bullishness. Meanwhile, weaker data for the currency will be negative, indicating bearishness
Commodity Price Index
Commodity Price Index or CPI is a popular forex trend indicator to watch. The data calculates the weighted average of goods and services of 200 commodities, including food, energy, transport, and others.
CPI is the key to measuring inflation in the country. The indicator is used to determine whether the government is performing well or not in the commodity market. CPI can cause significant swings in the price of related currency.
Impact
Suppose you are trading in EUR/USD. A higher data than expected data would be bullish for EUR/USD. Meanwhile, lower-than-expected data would be bearish for EUR/USD.
Inflation
Inflation is the most important fundamental forex indicator that significantly impacts trading. Inflation can be defined as a decrease in the purchasing power of goods and services.
Inflation deals with how expensive goods or services become against the currency. It helps to determine the health of an economy. A country sets a target to keep inflation up to a certain rate and makes policies to achieve it.
Impact
High Inflation means lower purchasing power and weakness in currency. Meanwhile, low inflation means high purchasing power and strength in the currency.
Interest rates
The country’s central bank determines the interest rate. It can be defined as the rate at which a commercial bank borrows currency from a central bank over a particular period.
Interest rates and inflation are correlated fundamental indicators in forex. Central Banks generally increase the interest rate to slow down economic activity, which results in high inflation. At the same time, a decrease in the rate of injecting money into the market results in low inflation.
Impact
Interest rates play a crucial role in the world of foreign exchange. High interest rates attract investors and positively impact the currency. Meanwhile, low interest rates mean lower demand, which negatively impacts the currency.
Central banks
The Central Bank is the financial center of a country that issues its currency. It is responsible for managing the demand and supply of a currency, interest rate, inflation, monetary policy, exchange reserve, etc.
Federal Reserve Bank, European Central Bank, Bank of England, Bank of Japan, and Reserve Bank of Australia are among the major central banks. A trader needs to keep a watch on the central banks’ announcements and policies. Suppose you are trading in EUR/USD; the FED and Bank of England will be important fundamental indicators for you.
Impact
The speeches and announcements of the central bank’s chairman can provide valuable insight into the currency market. These clues are popularly known as Hawkish (bullish) and dovish ( bearish).
Employment data
Employment data provide valuable insight into the employment conditions in the country. The unemployment rate, average hourly earnings, average workweek, and employee participation are some of the major employment data.
Impact
The better and the more positive the employment data is, the more strength a currency will gain. Meanwhile, the negative data indicates bearishness for currency.
NFP (Non-Farm Payrolls)
Non-farm payroll is also a fundamental indicator of employment. However, it is far more important than the others, especially for currency trading. The data cause significant market volatility in currency pair’s prices.
NFP represents the total number of paid workers in the USA, excluding nonprofit organizations, private households, and farms. It is released every Friday and reveals the job addition compared to the previous month.
Impact
A higher-than-expected NFP is generally positive for USD. It is when the job addition is more than 100,000 a month. Meanwhile, a lower-than-expected NFP is bearish for USD.
Retail sales
Retail sales are another popular fundamental indicator in forex. They deal with the total amount of goods sold during a particular period. The data provide insight into consumer spending and demand in the US market.
Retail sales reports are released on a yearly and monthly basis. Traders, investors, analysts, researchers, and marketers monitor the data to make effective trade decisions.
Impact
The increase in retail sales is positive for the USD, suggesting bullishness. Meanwhile, the decrease in retail sales is negative for the USD.
FOMC
The United States has the strongest economy, and the US dollar is the strongest currency. So, the financial health of the US has an impact on the entire financial market.
The Federal Open Market Committee (FOMC) consists of Twelve Authorities from the USA, including the FED chairman. These people meet eight times a year to discuss the US financial condition, monetary policy, interest rates, and other important aspects.
Forex traders keep an eye on these meetings and speeches of its members to predict the currency market. FOMC meetings and press releases create huge volatility, which makes trading quite risky.
Impact
A positive outlook or comments on US economic conditions indicate bullishness for USD. Meanwhile, a negative comment on US economic health will be bearish for USD.
Trade balance
A trade balance is the difference between a country’s imports and exports. A country exports and imports a number of goods and services for smooth flow.
When the export is more than the import, it is regarded as a trade surplus, and when the import is more than the export, it is regarded as a trade deficit.
Impact
A trade balance showing a high surplus will be positive for the currency; meanwhile, a trade balance showing a trade deficit will be negative for the currency.
Wrapping Up
Fundamental indicators in forex cause a significant movement in the currency price. So it does not matter whether you are a news trader or not, you must watch them.
Many traders avoid trading during big economic data releases and other fundamental events. The reason is that the market is quite uncertain during such events.
Also, we have seen that some fundamentals have positive while some have negative impacts on currency pairs. However, the forex pairs do not always move based on the findings. That’s why you need to consider sentimental and technical analysis factors before making a trade decision.