What does Fundamental analysis mean for the Forex market?
It means nearly everything, as the Forex market is more sensitive to political, social, and economic factors in a country. This is because it is often difficult for investors to accurately decide on good entry and exits points in the market.
Deciding what positions to take in the currency market requires a comprehensive understanding of a country’s economic health. Traders should be aware of political policy and constantly review economic events. Be cognizant of breaking financial news, which could significantly impact currency attractiveness, thereby leading to strong price movements. Currency appreciation occurs when demand increases for a currency by speculators and buyers. Currency depreciation takes place when there is limited demand for a currency, when there are more sellers than buyers.
Interest Rate Policy
When a central bank determines an appropriate interest rate policy, policy makers consider several economic factors. Often, overall income level is reviewed in two distinct areas; Spending and Savings. The central bank looks at consumer spending patterns to see if sales will increase, which means more production is needed to meet the increasing demand for products and services. This will eventually lead to an increase in Employment, which is indicative of an active and growing economy. Economic growth often leads to inflationary pressures, and central banks often cause interest rates to rise in order to limit inflation. However, if most consumers are saving their money instead of spending it, interest rates might need to be reduced in order to stimulate a stagnated economy.
All economies have cycles of recession, stagnation, and growth. If economic growth is sluggish, a country’s central bank will often cut interest rates to limit bank saving return, and to make borrowing and investing more appealing. Economic and fiscal policies have huge impacts on overall financial health and economic cycles.
It is important to determine the importance of economic indicators, which can provide you with important clues about future economic performance. Investors can choose strategies that are best suited for current and future market conditions.
Due to the many factors that influence an overall economy, it is important to constantly update yourself on current news and events. Something as innocuous as the weather could impact a country’s crop season, thereby affecting overall economic output and currency value.
Pay attention to even the smallest details, as this could affect your investment portfolio.