How To Conduct Fundamental Analysis in Forex?
This video looks at the five key drivers for Fundamental Analysis and how they affect currency prices.
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
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Just quickly following up with a question from a subscriber asking us what process can they follow to actually conduct fundamental analysis in Forex.
Let's just jump into the key fundamental factors or drivers that we need to focus on. Now, there are a few key drivers that should always form the base of our fundamental analysis. And remember the goal is to establish whether something is cheap or expensive and because our focus is on currencies for this video, we need to understand what fundamental factors will drive the value of a currency up and down.
So with this in mind, we basically have five factors we always need to evaluate. The first one is economic performance, fiscal policy, geopolitics, intermarket analysis, and then monetary policy. Now this list isn't written in the order of importance as the central bank actions or monetary policy is always the main driver of the currency. We need to evaluate the first four always in line with how that might affect monetary policy going forward. So looking at the first one, economic performance.
That's always the best place to start. So what is the overall state of the economy? Now, the current economic performance and of course the expected or the projected performance are the key factors that governments as well as the central banks will use to say things like fiscal policy and monetary policy.
So when assessing the overall economic performance, a good place to start is always with the big three, that'll be your growth or your GDP, your inflation or CPI, and then of course, the labor market or employment. So determining whether the economy is growing or shrinking, that will be your GDP determining whether the economy has stable prices or where the prices are too low, which is basically deflation or where the prices are too high and whether the overall health of the labor market is intact.
So those are key points that we need to always be analyzing for the overall health of the economy. Now, even though growth is a very important metric, inflation can often be a bigger focus point for the market.
When an economy is growing at a healthy pace, inflation should also rise at a healthy pace, which basically will bring unemployment down at a healthy pace, which is the ideal sweet spot for where the central bank wants to take the economy.
Now, when growth is basically moving too fast, it basically risks prices going too high too fast, which brings recession risks as it can choke consumer spending if prices are too high.
So if growth is running hot and inflation is picking up, that usually leads to expectations of tighter monetary policy or expectations that the central bank will hike interest rates and basically perform things like quantitative tightening.
Now, when the growth is too low, for example, it risks taking prices too low as well, which basically causes deflation, which also brings recession risks as it can basically force people to cut back on spending because they think that things will get cheaper as prices start to go lower. So if growth is running very low and inflation is moving lower as well, that usually leads to expectations of looser monetary policy or basically cutting interest rates and performing things like quantitative easing.
Now looking over to fiscal policy, that also flows from the overall health of the economy where the government will increase or decrease spending, and whether they will increase or decrease things like taxes. So a weaker economic outlook can lead to more spending and more tax cuts. And thus a booming economy often leads to the government basically increasing taxes or maybe reducing spending just as a very basic example.
So fiscal policy and other key metrics that we need to look at, obviously in the lens of what it will or how it will affect monetary policy sending to geopolitics, very important consideration especially through the lens of how the central bank will react. So elections are something we always need to keep in mind. If one candidate is more pro-business, for example, and would most likely see more fiscal policy, more stimulus tax cuts, etc.
That will be a positive factor for the economy and would also opt for possible tighter monetary policy.
***For more detail, please watch the video or go to www.forexsource.co for more information.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
Just quickly following up with a question from a subscriber asking us what process can they follow to actually conduct fundamental analysis in Forex.
Let's just jump into the key fundamental factors or drivers that we need to focus on. Now, there are a few key drivers that should always form the base of our fundamental analysis. And remember the goal is to establish whether something is cheap or expensive and because our focus is on currencies for this video, we need to understand what fundamental factors will drive the value of a currency up and down.
So with this in mind, we basically have five factors we always need to evaluate. The first one is economic performance, fiscal policy, geopolitics, intermarket analysis, and then monetary policy. Now this list isn't written in the order of importance as the central bank actions or monetary policy is always the main driver of the currency. We need to evaluate the first four always in line with how that might affect monetary policy going forward. So looking at the first one, economic performance.
That's always the best place to start. So what is the overall state of the economy? Now, the current economic performance and of course the expected or the projected performance are the key factors that governments as well as the central banks will use to say things like fiscal policy and monetary policy.
So when assessing the overall economic performance, a good place to start is always with the big three, that'll be your growth or your GDP, your inflation or CPI, and then of course, the labor market or employment. So determining whether the economy is growing or shrinking, that will be your GDP determining whether the economy has stable prices or where the prices are too low, which is basically deflation or where the prices are too high and whether the overall health of the labor market is intact.
So those are key points that we need to always be analyzing for the overall health of the economy. Now, even though growth is a very important metric, inflation can often be a bigger focus point for the market.
When an economy is growing at a healthy pace, inflation should also rise at a healthy pace, which basically will bring unemployment down at a healthy pace, which is the ideal sweet spot for where the central bank wants to take the economy.
Now, when growth is basically moving too fast, it basically risks prices going too high too fast, which brings recession risks as it can choke consumer spending if prices are too high.
So if growth is running hot and inflation is picking up, that usually leads to expectations of tighter monetary policy or expectations that the central bank will hike interest rates and basically perform things like quantitative tightening.
Now, when the growth is too low, for example, it risks taking prices too low as well, which basically causes deflation, which also brings recession risks as it can basically force people to cut back on spending because they think that things will get cheaper as prices start to go lower. So if growth is running very low and inflation is moving lower as well, that usually leads to expectations of looser monetary policy or basically cutting interest rates and performing things like quantitative easing.
Now looking over to fiscal policy, that also flows from the overall health of the economy where the government will increase or decrease spending, and whether they will increase or decrease things like taxes. So a weaker economic outlook can lead to more spending and more tax cuts. And thus a booming economy often leads to the government basically increasing taxes or maybe reducing spending just as a very basic example.
So fiscal policy and other key metrics that we need to look at, obviously in the lens of what it will or how it will affect monetary policy sending to geopolitics, very important consideration especially through the lens of how the central bank will react. So elections are something we always need to keep in mind. If one candidate is more pro-business, for example, and would most likely see more fiscal policy, more stimulus tax cuts, etc.
That will be a positive factor for the economy and would also opt for possible tighter monetary policy.
***For more detail, please watch the video or go to www.forexsource.co for more information.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
