Definition Of fundamental analysis

Fundamental analysis in the equity and foreign exchange market

Stock

The fundamental analysis is used to determine the true value of a company on the basis of fundamental company data. In a fair-rated company, the value of the company corresponds to the enterprise value traded on the market. The fundamental analysis is based on a variety of relevant economic and political factors. Important factors from the economy as a whole, the local sector and business data of the company play an important role. Some of the most important key figures are, for example, the production costs against revenue and sales.

Foreign exchange market

A Forex fundamental analysis is based on the fundamentals for each currency. Crucial information is given by the data from the country of origin for the currency: What about the key interest rate levels of the currency? How does the central bank influence interest rates? What political issues play a role there? How stable is the economy? Important metrics include gross domestic product (GDP), industrial production, employment data, interest rates, the consumer price index (CPI) and government stability.

Predictions of a Forex Fundamental Analysis

If you want to do a good fundamental analysis, you will check as many of these points as possible, regularly for each currency. The two selected currencies are then put into perspective to create a forecast. In general, such forecasts are not specific, objective figures for the exchange rate, but a general, trend-setting outlook on the currency pair.

Outlook of a fundamental analysis

The outlook may be positive, negative or neutral after the analysis. This would mean that the analyst expects the exchange rate for the currency pair to rise, fall, or remain roughly constant. These are, of course, important findings in order to be able to assess profit or loss.

Market balance

Some new fundamental information may suddenly enter the foreign exchange market. These new findings then lead to reactions from traders. Significant market movements and volatility may result. At such moments, this fundamental state lasts until the market has processed the new input.

There are a number of fundamental factors that can influence market movements. These can lead to unexpected results in trading systems based on purely technical analyses.

It is therefore worth knowing the impact of such fundamental developments on the reliability of fundamental analysis. This will allow a quick assessment of the likely future orientation.

Fundamentals

Important fundamentals are regularly published by relevant authorities or agencies (e.g. Ifo Institute). These statistics are eagerly awaited by the stock exchange and traders.

The published figures are assessed very differently. For example, the labour market figures from the US have a higher weighting on global equity and foreign exchange markets, in particular the EURO/USD exchange rate, than labour market figures from Brazil, for example.

Basic data items that have the greatest impact on the currency rate and its relationship to other currencies are listed below.

Fundamental analysis factors

Important fundamentals are regularly published by relevant authorities or agencies (e.g. Ifo Institute). These statistics are eagerly awaited by the stock exchange and traders.

The published figures are assessed very differently. For example, the labour market figures from the US have a higher weighting on global equity and foreign exchange markets, in particular the EURO/USD exchange rate, than labour market figures from Brazil, for example.

Basic data items that have the greatest impact on the currency rate and its relationship to other currencies are listed below.

Key economic factors

Many traders conduct a daily review of the economic calendars for the currency pairs in which they hold positions. This is because the publication of such key information and key metrics can often lead to significant short-term volatility in the foreign exchange market and timely mood swings.
Here you will find a list of the most important economic factors that are regularly discussed in the latest news and which can move the market when published. The analysis of these movements is important for every investor.

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Interest rates:

They are a key element when comparing two currencies. When interest rates are raised in one country, the national currency becomes more attractive to other currencies with lower interest rates.

Employment data:

If a country employs an increasing percentage of its citizens, it will lead to its currency becoming stronger. These metrics are typically in the form of unemployment claims, payrolls, or the unemployment rate.

Inflation:

If the country is in an inflationary cycle, as indicated by the consumer and producer price index’s, the CPI and the PPI, this would increase the likelihood that the country’s central bank would raise interest rates to stem the rise in inflation. An increase in interest rates would tend to make the currency appreciate.

Gross domestic product (GDP):

GDP represents the total number of goods and services produced by a country and reflects the growth of the economy.

Industrial production:

A strong industrial base with large companies will tend to strengthen a nation’s currency.

Retail sales:

Strong retail sales are generally favorable to a currency and a nation’s economy as a whole.

Consumer Price Index (CPI):

The CPI is a measure of inflation. Rising inflation in one country suggests that national central banks may soon tighten interest rates. They will tend to have their currency appreciate.

Trading or currency balance:

A trade or current account surplus or deficit either favours the exchange rate for the country with a surplus or weakens the rate for the country with a trade deficit.

Credit:

This is another economic factor that directly influences prices. If a country has borrowed excessive amounts of money from other nations or from the IMF, its currency will certainly reflect the high level of debt.

Other factors for fundamental analysis growth:

Changes in gross domestic product are a useful measure of growth. A growing economy with strong companies tends to strengthen a currency.

Prices:

The level of short-term interest rates, such as the Fed Funds Rate, in the country of origin of the currency influences foreign exchange rates. Higher interest rates provide an investment incentive that should strengthen the currency.

Trade:

A nation’s trade and current account balance can affect foreign exchange rates. Persistent trade or current-account deficits tend to devalue the country’s currency.

Impact on supply and demand:

Substantial capital flows into one currency and from another currency, perhaps as a result of large transactions by strong companies or managed portfolio relocations, can shift the exchange rate for the currency pair in favor of the currency with higher demand.

Monetary policy:

Given the impact of monetary policy on interest rates, this is an important element in the valuation of a currency. Tighter monetary policy is likely to imply higher interest rates, while loose monetary policy indicates lower interest rates.

Political influences:

Currencies of countries with stable governments are preferred by investors over currencies of countries with less favorable political conditions. Greater fiscal responsibility also tends to support the currency. Excessive government spending, in turn, tends to weaken the currency.

Commodity price:

The price of important commodities such as gold and oil tends to influence the value of the currencies of countries that export and import these commodities in large quantities. For example, higher oil prices help the British Pound (GBP) and the Canadian Dollar (CAD), while they hurt the US dollar and the Japanese yen. Moreover, higher gold prices tend to have a positive impact on the Australian dollar (AUD) and, through the close link, the New Zealand Dollar (NZD). Australia exports this precious metal, so its currency will benefit from an increase in the value of gold.

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