Fundamental analysis traders try to predict the effects of economic, social and political changes on currency prices. Prices on the foreign exchange market are impacted by macroeconomic factors such as inflation, the unemployment rate and industrial production. Based on the analysis of economic data, traders will place orders on the market in order to make gains. For the Grand Capital this is essential now.
It is quite easy to find information on economic data. Among the sites which allow to follow the news and which give some analyzes, we particularly like the following:
- Forex Trading Sat: it is the one that is first in my favorites, with news and analysis constantly updated. Ideally when we have a doubt about a trend, we admit taking a look at the analyzes to confirm / refute my forecasts.
- DailyFX: the news feed can scare at first sight, but the advantage is that it is very complete! we started with this one, which only existed in English at the time, but the French version now exists.
- Brand new, practical and very nice, RTFX info provides daily analyzes and the evolution of live prices. The most of this site is the mobile app! Ideal for addicted traders (like me).
Okay, back to our technical analysis, now that you know where to find the news. Traders must focus on three main macro economic factors when analyzing exchange rates:
Each currency has an interest rate determined by the country’s central bank. If inflation is too high, the central bank can increase this rate to stabilize the economic system. Conversely, if economic activity is too weak, the central bank can lower interest rates to stimulate growth. A low interest rate generally leads to currency depreciation (partly because it attracts traders who carry the carry trade). The carry trade is a strategy which consists in selling a currency which has a low interest rate and to buy those with high interest rates.
The unemployment rate is a key indicator for assessing the health of an economy. If a state has a high unemployment rate, it means that the economy is unable to provide employment for all citizens. The consequence is a depreciation of the currency.
Major political changes have an impact on the foreign exchange market.
In May 2005, everyone anticipated a French vote against the European constitution. As France was one of the engines of the European economy, traders sold the euro and bought dollars. The euro fell so much that many traders thought it couldn’t lose more value.
But they were wrong. When the French actually voted against the constitution, the EUR / USD lost more than 400 pips in three days. The traders who bought the euro lost colossal sums. And of course, those who were short on the euro won a lot.