In this lesson, we will cover the most important fundamental indicators.
Compared to technical analysts, fundamental traders look at various economic indicators and reports to better understand future market directions. Even though most retail traders focus on technical analysis, understanding the fundamentals is always helpful. Especially for swing traders, if we look at the bigger picture and in the longer time horizon, markets are most often moving based on fundamental drivers. There are dozens of different fundamental indicators for different countries and we certainly do not have to know all of them. Here are the most important ones that tend to have an impact on the markets.
Employment reports include employment change, unemployment rates, number of jobless individuals applying for government support, level of payrolls and other job-related data. The most famous employment report is the US NFP which is normally released on the first Friday of every new month.
Gross domestic product (GDP)
Changes in the GDP can have a large impact on foreign currency. An increase in GDP tells us that the economy is strengthening, and currency could rise. A decrease in GDP indicates a weakening economy, therefore the possibility of failing prices in the currency.
Trade balance represents the difference between the imports and exports of the subject economy and affects the demand for that country’s currency. There are two possible outcomes – a deficit, which means the country is importing more than exporting and a surplus which is the opposite.
Consumer price index (CPI)
The consumer price index tells us prices of products on a consumer level and it is also a key indicator of inflation. Changes in CPI can directly influence monetary policy as it is mandatory for most major central banks to control inflation. An increase in inflation usually indicates an interest rate rise, while lower CPI readings indicate lower interest rates.
The purchasing managers index (PMI)
The purchasing managers index shows the activity of purchasing managers and can act as a leading economic indicator. PMI indicates strength or weakness in the manufacturing sector.
Interest rate decisions
Interest rates are part of the central bank’s monetary policy. The leading indicators include activities and speeches by bank officials that are regularly watched by traders. Interest rate changes by central banks are very important in the valuation of currencies. If banks set high-interest rates, their currency usually attracts foreign assets from countries with lower interest rates.
Central bank statements
Most central banks issue statements to describe their monetary policy and why they did or did not make any changes. These statements affect the markets, especially if the changes are unexpected. We use the terms hawkish and dovish in the central bank’s decisions. Central banks are hawkish when they want to tighten monetary policy by increasing interest rates or reducing balance sheets. Being hawkish means strong economic growth. Dovish is the opposite when banks reduce interest rates or increase quantitative easing to stimulate the economy. Being dovish means weak economic growth.