Forex traders use what is known as fundamental analysis to help decide how to trade in the currency market. This type of analysis takes into consideration statistical data and economic indicators in order to determine the value of one currency against another. Fundamental analysis may include interest rates, inflation indicators, employment reports and a variety of other data sets and economic measurements.
Most countries use a central bank as the main authority on a nation’s financial and monetary matters. Usually the central bank will implement monetary policies aimed at creating consistent employment and overall economic growth. Also, the central bank will use monetary policy to help stabilize a country’s financial system by managing, producing and distributing a country’s currency.
Monetary policy decisions that central banks make are important to forex traders because these decisions are highly influential on the supply and demand of a currency. When a central bank purchases currency to hold in reserves, this reduces the amount of currency available, causing the currency’s valuation to go up based upon falling supply. Inversely, selling its reserves back into the market will put downward pressure on a currency’s valuation.
Market participants and economists look at economic indicators in order to interpret the health and trajectory of a country’s economy. Forex traders use economic indicators specifically to determine the future trajectory of particular currency pairs they are looking to trade. Economic indicators can vary in their scope and focus and are usually scheduled to be released on a regular periodic basis.
In general, economic indicators are sets of data related to a country’s economy. This may mean measurements of signs of inflation, international trade flows, consumer confidence, employment, housing and overall business environment. Some of the most commonly used economic indicators include gross domestic product (GDP), consumer price index (CPI), producer price index (PPI), and various types of employment reports.
It may be confusing at first for a forex trader due to the numerous economic indicators available. This can make it difficult to decide which economic indicators are the most important. The answer to this is not universal. Which indicators to pay attention to will depend upon each individual trader’s specific strategy.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.