Home
Fundamental Analysis
Fundamental analysis focuses mainly on the economic, social and political forces that drive the supply and demand, hence the market price. This type of analysis concentrates on macroeconomic indicators such as economic growth rates, interest rates, monetary policy, inflation and unemployment.
The key to fundamental analysis is to gather and interpret this information and act before the information is incorporated into the market price. The lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist.
Example
Using the currency market as an example, there are times that governments through their Central Banks stand in the way of market forces impacting their currencies. Hence, they intervene to keep currencies from deviating markedly from undesired levels.
Currency interventions have a notable and oftentimes temporary impact on FX markets. A central bank could undertake unilateral purchases/sales of its currency against another currency; or engage in concerted intervention in which it collaborates with other central banks for a much more pronounced effect. Alternatively, some countries manage to move their currencies, merely by hinting, or threatening to intervene.
Factors
Here are some major fundamental factors that can affect market prices:
- Decisions on interest rates made by central banks such as the US Federal Reserve or the European Central bank (ECB) monthly.
- Quarterly GDP figures. Only preliminary national GDP figures generally have the effect of changing market sentiment.
- Market sentiment data. Market expectations are formed from one week to two days before the event. If the figures are not a surprise for participants placing orders based on such expectations, profit making is usually the result.
- Political Events. National elections, terrorist attacks and conflicts are events that have affected the markets.
- Major indices. Inflation indices, Institute of Supply Management (ISM) in the US and the Purchasing Management Index (PMI) in Europe are also carefully followed by traders.
- National industrial production figures. US non-farm payrolls (indicating new jobs created), Michigan sentiment figures in the US , the German business climate or IFO index, and the Tankan quarterly survey in Japan.
