No matter if you are willing to apply a fundamental strategy, or not, understanding deeply the current macroeconomic landscape is very helpful in anticipating the formation of strong price trends.

 

Fundamental Forex Strategies & Key Fundamental Data

 

The fundamental Forex strategy involves opening positions in the Foreign Exchange market based on hard data and fundamental analysis. In general, the fundamental analysis aims to anticipate future market conditions based on the analysis of key economic indicators and hard macroeconomic data.

The importance of Fundamental Analysis

Fundamentals are often ignored by many Forex investors, and that is a serious mistake, especially as concerns swing and position traders. No matter if you are willing to apply a fundamental strategy, or not, understanding deeply the current macroeconomic landscape is very helpful in anticipating the formation of strong price trends.  A fundamentalist is always aware of the basic macroeconomic conditions in the market and can predict when the macroeconomic cycle is likely to shift. The macroeconomic cycle plays a tremendous role in the future decisions of Central Banks regarding the level of interest rates. The level of interest rates is at the core of any Forex pair valuation.

 

Examples of Common Fundamental Forex Strategies

Here are some common fundamental strategies:

 

(1) Macroeconomic Conditions Strategy

As all currencies trade in pairs, there is always an economy that is in better shape than another. This fundamental strategy involves reading carefully the macroeconomic cycle of two economies and making an educated decision by going long on the economy that will likely perform better than the other, in the near future.

(2) Interest Rate Cycle Strategy

As mentioned above, the level of interest rates is the most important component of any Forex pair valuation. The interest rate cycle involves two distinct phases: (i) lower rates to stimulate the economy and consumption (ii) higher interest rates to deal with inflation. These two phases create a never-ending macro-cycle that plays a key role in the Foreign Exchange market.

(3) News Trading Strategy

This strategy involves trading new macroeconomic conditions based on major economic news releases. The most important news releases involve inflation, growth, unemployment, and of course interest rate decisions.

(4) Carry Trade Strategy

Carry trade is a very popular Forex investing strategy that involves borrowing or selling a Forex currency with a low-interest rate, and at the same time buying a Forex currency with a higher interest rate.

Read more on Forex-Investors: » https://forex-investors.com/strategy/carry-trade-strategy

 

 

Major Categories of Fundamental Data

 

These are the major categories of fundamental data that highly affect the Foreign Exchange markets:

 

  1. INTEREST RATES

The level of interest rates defines to a high extent the desire of foreign capital to buy a Forex currency. The interest rate decisions are at the core of every monetary policy which is implemented by central banks. Any unexpected change in the level of interest rates can turn the Forex exchange rates upside down. Even rumors may lead to substantial movements.

Worlds Real Interest Rates: » http://data.worldbank.org/indicator/FR.INR.RINR

 

  1. EMPLOYMENT REPORTS

If employment figures are improving for an extended period of time, then the interest rates will probably go higher. That is good news for Forex investors and therefore, better labor figures lead to currency appreciation.

Major Reports

(1) Eurostat: » http://ec.europa.eu/eurostat/statistics-explained/index.php/Unemployment_statistics

(2) US Bureau of Labor Statistics: » http://www.bls.gov/

 

  1. GROWTH REPORTS

There are a lot of different economic reports that that can highlight the growth potential of an economy: GDP, Housing Permits, Manufacturing Production, Manufacturing Inventories, Consumer Spending, Retail Sales, and etc.

(a) GROSS DOMESTIC PRODUCT (GDP)

□  Global GDP Growth (WorldBank): » http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

(b) RETAIL SALES REPORT

□ US Retail Sales Report: » http://www.census.gov/retail/index.html

(c) INDUSTRIAL PRODUCTION INDEX

□  IPI Reports (US): » https://research.stlouisfed.org/fred2/series/INDPRO

 

  1. INFLATION REPORTS

Inflation reports are important as inflation is considered an indicator of growth but also because extended periods of higher inflation lead to higher interest rates. Forex markets favor strong growth and higher inflation.

 

  1. TRADE BALANCE

Trade balance measures the difference in value between a country’s imports and exports of goods and services. A surplus occurs if exports exceed imports. A deficit occurs if imports exceed exports.

A trade surplus enhances the demand for the domestic currency and a trade deficit enhances the supply of the domestic currency.

 

  1. GEOPOLITICAL RISKS AND EVENTS

Forex exchange rates are very sensitive to geopolitical events and new political risks. Geopolitical risks include civil unrest, terrorism, war, extreme weather conditions or anything else that may jeopardize economic stability and create uncertainty. Historically, during periods of extended global geopolitical uncertainty, the US Dollar and the Swiss Franc are moving higher.

 

  1. COMMODITY PRICES

Commodity prices affect all commodity currencies such as AUD, NZD, and CAD.

IMF PRIMARY COMMODITY PRICE INDICES

□ The IMF Commodity Indices: » http://www.imf.org/external/np/res/commod/index.aspx

 

  1. GOVERNMENT BONDS AND YIELDS

The yield of fixed-income securities which includes government bonds may pinpoint the confidence in a particular economy. The price of fixed-securities changes based on fundamental data but also based on the general market sentiment. Significant changes in the Government bonds yields are an early signal that something is going on.

 

9. COT (Commitment Of Traders Report)

This is an important report that helps Forex investors to understand what the big players are doing right now. This report is a key tool predicting major exchange rate shifts in the near future.

COT (Commitment Of Traders Report)

(i) CFTC: » https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

(ii) CME Group: » https://www.cmegroup.com/tools-information/quikstrike/commitment-of-traders-agricultural.html

 

10. Beige Book (FED)

The Beige Book or else the “Summary of Commentary on Current Economic Conditions” is released 8 times a year by FED. The Beige Book aims to summarize the economic conditions and includes:

  • New orders for capital goods
  • New building permits
  • Manufacturing orders (consumer goods)
  • Average manufacturing weekly hours
  • Monetary supply (Inflation-adjusted)
  • Initial applications for unemployment insurance
  • And more

The Beige Book: » https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm

 

 

Comparing Fundamental & Technical Analysis

 

If the fundamental analysis is the 'Logical Brain' of the market, the technical analysis is the 'Soul'. The best decisions in life are those that include both. Fundamental analysis is not competing with technical analysis. These two powers show the way for successful investing and perfect timing. Smart investors use Fundamental analysis to make decisions and technical analysis to time these decisions.

 

Table: Comparing Fundamental & Technical Analysis

FUNDAMENTAL ANALYSIS

TECHNICAL ANALYSIS

  • Based on hard fundamental data
  • Based on T.A. tools and techniques
  • Helpful in recognizing the ‘Fair Value’ of any financial-traded asset
  • Helpful in identifying the perfect time to enter or to exit the market
  • Is used by a small percentage of all Forex investors
  • Is used by a large percentage of all Forex traders
  • Requires extensive research and a good understanding of the macroeconomic cycle
  • Requires a good understanding of basic trend indicators

 

 

Fundamental Forex Strategies & Key Fundamental Data

G.P. for Forex-investors.com (c)

January 2020