In sharp contrast with technical analysis, fundamental analysis considers all other factors that can influence financial markets, mostly economic news. Fundamental analysis also considers political and geopolitical decisions, natural phenomena, wars, macroeconomic developments, etc.
Fundamental analysis is a complex field dealing with interpreting different economies or economic evolution in various parts of the world, then interpreting how currency pairs will move.
Fundamental analysis appeals to investors via a process called news trading. Investors watch the economic calendar closely for critical economic data and then trade in the direction of the news.
Because the economic calendar is readily available to all and known in advance, investors use it to position themselves, often on small to very small timeframes.
Swing investors interpret the economic news between two central bank meetings. The idea is to gather the relevant data and form a general picture of the economy. Armed with this information, traders try to predict what the central banks will do: hike rates, cut rates, or keep them the same.
Investors use fundamental analysis too. They look at the bigger picture, at macroeconomic changes, political decisions, how interest rates in one part of the world affect the overall monetary policy, elections, referendums, etc.
News announcements to follow
We can say that anything other than technical analysis belongs to fundamental analysis. Because economic news and economic data is a big chunk of it, here are the most significant news announcement to watch out for when trading the currency market:
- Central bank interest rate decisions & press conferences. While not strictly considered economic news, interest rate decisions – and the press conferences that follow them – are the main reason why markets move. They sum up economic development, and central bankers tend to act upon economic changes. Every piece of economic data released from two central banks meeting is interpreted with a view on future monetary policy changes.
- Inflation (CPI – Consumer Price Index). Inflation is part of any central bank’s mandate. The decision-makers look at changes in inflation before hiking or cutting the rates. As a rule of thumb, higher inflation triggers rate hikes (bullish for the currency), while lower inflation triggers rate cuts (bearish for the currency).
- Jobs data. Job creation and the stability of the job market is a crucial ingredient for economic prosperity. Low unemployment rates and constant job creation leads to economic growth. This, in turn, leads central banks to hike their rates, which makes the currency ‘bullish’. When the opposite occurs, central banks cut rates and the currency becomes ‘bearish’.
- PMI’s (Purchasing Managers Index). A survey known by different names around the world, it shows the state of each economic sector: manufacturing, services, sometimes construction. It offers a glimpse into the health of the economy way before the central bank’s decision, so traders use it to adjust their position before the possible changes in monetary policy.
- Consumer-related data. Retail sales, disposable income, and anything related to the state of the consumer in an economy/region is an indicator of what the central bank will do at the next meeting.
Besides economic data, major political and geopolitical events can also move the financial markets. In recent years, the U.S. Presidential Election (Donald Trump’s election), the French Election (Macron’s election), the Brexit referendum, have all created sharp moves in their aftermath.
- Natural phenomena. Finally, natural phenomena like hurricanes, heavy snow, tsunami, and earthquakes, can cause significant economic damages and affect a currency, and the currency market in general.
- Everything that isn’t technical analysis is called fundamental analysis.
- All types of investors use it; scalpers, swing traders, serious investors.
- Economic data and its interpretation are the biggest part of fundamental analysis.
- Politics and geopolitical changes influence macroeconomics, which in turn can alter market trends.