FOREX ANALYSIS

Is the study of determining whether to buy, sell, or wait on trading a

currency pair.

TYPES OF FOREX ANALYSIS

 Fundamental analysis
 Technical analysis
 Sentiment analysis

What is Fundamental Analysis?

Is the analysis that focus on looking at the forex market by analyzing

economic, social, disasters and political factors that may affect
currency prices. Fundamental analysis essentially informs traders and
investors why the market advances and declines, and provides a trade
decision: to buy, sell or trade flat.

Fundamental analysis is composed of three core elements:

o Central bank policies

o Economic indicators
o Geopolitical events

These three components working in harmony should translate to

clearer market trends and present potential trading opportunities. If
one of these areas is in disorder, interpreting a fundamental picture
becomes difficult.

CENTRAL BANK

A country’s central bank is charged with the duty of regulating banking

institutions and implementing monetary policies.

Everything begins with the central bank and they’re assessment of

economic indicators. Traders and investors attempt to anticipate a
central bank’s actions by evaluating economic indicators and reacting
to the outcomes from the forecast.

The market projects a forecast for an economic indicator and

subsequently responds to the actual figure released

There are eight major central banks today:

  US Federal Reserve Bank (FED)
 European Central Bank (ECB)
 Bank of England (BOE)
 Bank of Japan (BOJ)
 Swiss National Bank (SNB)
 Bank of Canada (BOC)
 Reserve Bank of Australia (RBA)
 Reserve Bank of New Zealand (RBNZ)

ECONOMIC INDICATORS

Economic indicators, as their name implies, are statistics often on a

macroeconomic scale designed to measure economic activity. Traders
and investors use these indicators to analyses the well-being of a
country’s economy. Government organizations and private groups
release several economic reports on a weekly, monthly and quarterly
basis, each measuring activity in a particular segment of the economy.

Economic indicator data are released on economic calendar that trader

and investor use to analyses the market. Example of economic
indicators affecting forex market are

Gross Domestic Product (GDP): A measure of a country's economic

output. Changes in GDP can indicate the strength or weakness of an
economy.

Consumer Price Index (CPI): Measures inflation by tracking changes

in the prices of a basket of consumer goods and services.

Unemployment Rate: Indicates the percentage of the workforce that

is unemployed. Low unemployment rates are generally positive for a
currency.

GEOPOLITICAL EVENTS

Geopolitical tensions can complicate technical analysis and

fundamental analysis, distorting the general flow of key fundamental
drivers in the market. However, absent of disruptive geopolitical
events, trending markets become visible.

Geopolitics events are divided into wars and conflicts, terrorist attacks,
floods, upcoming election, pandemic, political unrest and protest as
well as international tensions. US-China trade is a good example and
the ‘Brexit’ situation (United Kingdom exit from the European Union).
The announcements surrounding geopolitical issues are usually not
scheduled, unlike the central bank announcements and economic data.
As you can imagine, this may cause confusion in currency markets and
make them difficult to trade.

Major Fundamentals that Play a Big Role in Forex Market

 Interest rate decisions by central banks

 Employment and Unemployment data
 Retail Sales
 Economic Growth (GDP)
 Inflation Report (CPI)
 Producer Price Index(PPI)
 Initial Jobless Claim
 Bank Holiday
 Non-Farm Payroll (NFP)
 Industrial Production Index
 Presidential Speech or Meeting

Interest rate decision

Interest rates play a significant role in influencing the forex market.

Central banks, which control monetary policy, use interest rates as a
tool to achieve economic objectives. Higher interest rates in a country
can attract foreign capital seeking better returns, leading to an
increase in demand for that currency. As a result, the currency tends
to appreciate.

How interest rate affects the currency price?

Interest rate differentials between two countries influence exchange

rates. Currencies with higher interest rates tend to appreciate against
currencies with lower interest rates. Traders and investors seek to
profit from interest rate differentials by borrowing in a currency with
low-interest rates and investing in a currency with high-interest rates,
a strategy known as the Carry Trade.

For example, if the interest rate in Country X is 6% and the interest

rate in Country R is 3%, investors may borrow in Country R's currency
at 3% and invest in Country X's currency, earning the 3% interest rate
differential.

Note; Carry trade strategy comes with its own set of risks. In particular,
if the value of the borrowed currency, known as the funding currency,
strengthens against the currency being invested in, the carry trade can
become unprofitable.

How do interest rate affects inflation?

Changes in interest rates affect inflationary pressures in an economy.

Higher interest rates can help control inflation by reducing consumer
spending and borrowing, thereby maintaining the currency's
purchasing power.

By rising interest rate people start to save more, which will push down
demand for goods and services and lead to lower prices. As demand
for goods and services fall, this should have a knock-on effect on
prices. Shops might even reduce the cost of goods to try to encourage
people to buy them.

Lower interest rates may stimulate economic activity but can also lead
to inflationary pressures if demand outpaces supply, potentially
eroding the currency's value.

In theory, inflation and interest rates have an “inverse” relationship:

 When interest rates are low, inflation tends to rise

 When interest rates are high, inflation tends to fall

Employment and Unemployment change

Changes in employment and unemployment levels can significantly

impact the forex market as they are key indicators of a country's
economic health. Employment data is closely monitored by traders,
investors, and policymakers, and it can influence currency values.

Increasing employment levels are generally associated with economic

growth and higher consumer spending. As more people are employed,
there is a boost in disposable income and consumer confidence. Strong
economic growth and increased consumer spending can attract foreign
investment, positively impacting the currency and vice versa is true.

Retail Sales

Retail sales data is a key economic indicator that can have a significant
impact on the foreign exchange (forex) market. Retail sales reflect the
total sales of goods and services by retailers to end consumers,
providing insights into consumer spending patterns.
Positive retail sales data often leads to increased confidence in the
domestic currency. As the economy appears strong, investors may
favor the currency, leading to appreciation. Conversely, weak retail
sales can lead to concerns about economic growth, potentially
resulting in a weaker currency.

What is Core Retail sale?

An economic indicator that tracks the month-to-month increase or

decrease in consumer spending excludes sales of automobiles and
parts, gasoline, and building materials. By focusing on core retail sales,
analysts can better assess the underlying trends in consumer behavior
and purchasing power.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is a fundamental economic indicator

that measures the total value of goods and services produced within a
country's borders over a specific period. As one of the most critical
indicators of a country's economic health, GDP has a profound impact
on the foreign exchange (forex) market.

High GDP growth rates are generally associated with a strong and
healthy economy. When a country's GDP is expanding, it often leads to
increased employment, higher income levels, and overall economic
prosperity. A strong and growing economy tends to attract foreign
investment, which can result in increased demand for the country's
currency and contribute to currency strength.

Inflation Report (CPI)

The Consumer Price Index (CPI) is a crucial economic indicator that

measures the average change over time in the prices paid by urban
consumers for a basket of goods and services including food and
energy. CPI is widely used to assess inflation, and its impact on the
foreign exchange (forex) market is significant.

Traders in the forex market closely monitor CPI releases and compare
them with market expectations. If CPI data deviates significantly from
expectations, it can lead to market volatility. Speculators may adjust
their positions based on the inflation outlook, affecting currency
values.

How the CPI affects currency price?

High CPI may inspire interest rate hikes by a central bank in an
attempt to control the inflationary trend. When a country’s interest
rates are higher, it is likely that its currency will strengthen as demand
for it increases.

Conversely, lower inflation may lead to decreased interest rates and

weaker demand for a country’s currency, prompting consumers to
spend, putting more money into circulation, and generally stimulating
a slower economy.

What is Core CPI?

Core CPI stands for Core Consumer Price Index. It is a measure of

inflation that tracks the changes in the price of a basket of goods and
services over time, excluding food and energy.

The rationale behind excluding food and energy prices is that they
tend to be more volatile and can fluctuate significantly due to factors
like weather, geopolitical events, or changes in oil prices. By excluding
these components, core CPI aims to provide a more stable measure of
underlying inflation trends, making it useful for policymakers and
economists in assessing the overall health of an economy and
formulating monetary policy.

If core CPI comes in higher than expected, it may lead investors to

anticipate tighter monetary policy in the future, which can strengthen
the currency. Conversely, lower-than-expected core CPI may lead to
expectations of looser monetary policy and potentially weaken the
currency.

Producer Price Index(PPI)

The Producer Price Index (PPI) is a key economic indicator that

measures the average change in selling prices that producers receive
for their goods and services. The PPI tracks price changes for a wide
range of goods and services at various stages of production, including
raw materials, intermediate goods, and finished goods. It covers
industries such as manufacturing, mining, agriculture, and utilities.

If the PPI shows a significant increase in producer prices, it may lead to

expectations of higher consumer prices in the future, as producers
may pass on these higher costs to consumers. In response, investors
and traders may adjust their inflation expectations, which can
influence currency prices. Currencies of countries experiencing higher
inflation expectations may depreciate relative to currencies of
countries with lower inflation expectations.

What is Core PPI?

Core PPI" typically refers to a subset of the Producer Price Index (PPI)
that excludes food and energy.

Core PPI data is important for economists, policymakers, and investors

because it provides insights into the underlying inflationary pressures
in the production process, which can eventually affect consumer
prices.

Non-Farm Payroll (NFP)

"NFP" stands for Non-Farm Payrolls. It is a key economic indicator

released by the United States Bureau of Labor Statistics (BLS) on a
monthly basis. The Non-Farm Payrolls report provides information
about the total number of paid workers in the U.S. economy, excluding
farm workers, government employees, private household employees,
and employees of non-profit organizations.

The Non-Farm Payrolls (NFP) report is a key economic indicator

released first Friday of each monthly in the United States. The Non-
Farm Payrolls report has a significant impact on financial markets,
particularly on currency, bond, and equity markets.

A higher-than-expected increase in non-farm payrolls is generally

considered positive for the economy and may strengthen the U.S.
dollar. Conversely, a lower-than-expected increase or a decline in non-
farm payrolls may be interpreted as a sign of economic weakness,
potentially leading to a weaker U.S. dollar.

Initial Jobless Claim

Initial Jobless Claims is a key economic indicator in the United States

that provides insights into the labor market's health. It measures the
number of individuals who have filed for unemployment benefits for
the first time during a given week.

A decreasing number of Initial Jobless Claims is generally interpreted

as a positive sign for the labor market and the broader economy. It
suggests that fewer individuals are losing their jobs, indicating
economic health and stability. Conversely, an increase in jobless claims
may signal economic challenges, potentially leading to negative
sentiment in the forex market.

Fundamental analysis is often complemented by technical analysis,

where traders analyze historical price charts and patterns. Successful
forex traders typically use a combination of both approaches and stay
informed about economic indicators and events that can impact
currency markets. It's essential to note that the forex market is
dynamic, and factors influencing currencies can change rapidly,
requiring traders to stay vigilant and adapt their strategies
accordingly.