Fundamental Analysis In Practice
Despite the fact that daily trading with binary options or trading on Forex cannot do without technical analysis, you should never forget that it is necessary to know external factors managing the price when analyzing the market. On this background, today we will learn what fundamental analysis is and how to use its principles in practice in trading on currency pairs.
So, let’s begin with the fact that the market is driven by a huge number of economic and financial factors that form the macroeconomic environment in any state. You just need to understand the sense of macroeconomic news and be able to use them in practice.
News of currency market
Basic feature of such analysis is new publications and possibility to trade on them. You all know that publication of important statistics stimulates activity of players on the exchange; the price makes impulsive jerks in one direction and this tendency can be long. But why does it happen? Now let us explain?
In fundamental analysis, various indicators matter, which create the entire economy of a state. These can be various economic indicators of states, capital movements and, of course, changes in the interest rate of central banks. At the same time, it’s not the very macroeconomic statistics itself in numbers that matters, but the reaction that it causes to investors and the market itself on a global scale. Some news may be positive for investors, and others – negative, which provokes the corresponded behavior on the market – the purchase or sale of asset.
But the truth is that fundamental analysis itself cannot guarantee accurate forecast on the market. There are always the number if sudden factors that cannot be predicted. Nevertheless, when receiving set of economic data, you will be able to draw a corridor in which the price will move; and adjust it with the help of technical analysis. The only one peculiarity – you need to analyze markets of both currencies simultaneously.
For example, let us take the currency pair AUD/USD. These are two different countries, with different central banks and key rates, as well as different economic indicators. Your goal is to understand why the value of the Australian dollar may increase or decrease relative to the US dollar.
Key interest rate
The most important indicator in fundamental analysis is the key interest rate, the change of which tremendously influences the market. One of the main tasks of the Central Bank is to control inflation. If there is strong inflation in the country, the bank tries to restrain it, and it does this by means of increasing the key interest rate. Increase of the key interest rate contributes to a slowdown in the economy, and its lowering – to development.
Why should we pay attention to the key interest rate when analyzing the market? The case is that the currency of this or that country depends on it. For example, increase of key rate by central bank of the USA contributes to the strengthening of USD. It means that we will see on the USD/AUD chart that AUD price decreases in relation to USD price, while rate decrease stimulates the decrease of AUD rate. In the example below, which is taken from the Binomo terminal, we see how, after the release of the news about the interest rate increase by the Central Bank of Australia, the rate of AUD against USD is rising.
The statements of heads of central banks are also important new that can significantly affect the fluctuations of currency pair quotes – just their remark about currency strengthening or weakening can provoke storm of trades on the market.
All the news related to the changes in economic indicators in the country strongly affects the fluctuations of currency pairs. For example, the index of business activity in the country or the volume of retail sales, the unemployment rate and quarterly reports of various sectors of the national economy. All this news is also capable of provoking active movement on the market, but the key interest rate is still the core aspect in the market.
Well, for the behavior of currency pairs quotations no to be for you the great and sudden surprise, you shall always track breaking news related to the Central Bank:
- about key interest rates;
- Central Bank Heads’ and Deputy Heads’ quotes;
- interviews with bankers;
- economical growth forecasts;
- new capital infusions in the country economy;
- about trade volume and commercial balance of states.
Tracking such news, you will always know for sure, what trend will rule in the market in the coming days, and therefore make more accurate forecasts for deals.