Fundamental Forex Strategy & Key Data

 

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

 

The Importance of Fundamental Analysis

 

Fundamentals are often overlooked by many Forex investors—a critical mistake, especially for swing and position traders. Whether or not you intend to apply a fundamental strategy, a deep understanding of the current macroeconomic landscape is extremely useful in anticipating strong price trends. A fundamental analyst remains aware of prevailing macroeconomic conditions and can often predict shifts in the macroeconomic cycle. This cycle significantly influences central bank decisions regarding interest rates—an essential factor in valuing any Forex pair.

 

Examples of Common Fundamental Forex Strategies

 

Here are some widely used fundamental strategies:

 

(1) Macroeconomic Conditions Strategy

 

Because all currencies are traded in pairs, one economy is usually performing better than the other. This strategy involves closely analyzing the macroeconomic cycles of two economies and making an informed decision—typically going long on the economy expected to outperform the other in the near future.

 

(2) Interest Rate Cycle Strategy

 

As noted earlier, interest rates are the most critical factor in valuing any Forex pair. The interest rate cycle has two main phases: (i) lower rates to stimulate economic growth and consumption, and (ii) higher rates to combat inflation. These alternating phases create a continuous macroeconomic cycle that plays a central role in the foreign exchange market.

 

(3) News Trading Strategy

 

This strategy involves trading on new macroeconomic developments driven by major economic news releases. The most significant reports concern inflation, economic growth, unemployment, and, of course, interest rate decisions.

 

(4) Carry Trade Strategy

 

Carry trade is a widely used Forex investment strategy. It involves borrowing or selling a currency with a low interest rate while simultaneously buying a currency with a higher interest rate.

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

 

 

Major Categories of Fundamental Data

 

Below are the primary categories of fundamental data that strongly influence the foreign exchange markets:

 

1. INTEREST RATES

 

Interest rates significantly impact the attractiveness of a currency to foreign capital. Interest rate decisions are central to every monetary policy implemented by central banks. Any unexpected change in interest rates can drastically shift exchange rates—sometimes even rumors can cause major market movements.

□ World’s Real Interest Rates: » http://data.worldbank.org/indicator/FR.INR.RINR

 

2. EMPLOYMENT REPORTS

 

A sustained improvement in employment figures often leads to higher interest rates, which is favorable for Forex investors. As a result, strong labor data generally supports 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/

 

3. GROWTH REPORTS

 

Various economic indicators reveal the growth potential of an economy. These include GDP, housing permits, manufacturing production, manufacturing inventories, consumer spending, retail sales, and more.

(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

 

4. INFLATION REPORTS

 

Inflation is both an indicator of economic growth and a trigger for interest rate adjustments. Extended periods of rising inflation typically lead to higher interest rates. Forex markets generally favor strong growth accompanied by moderate inflation.

 

5. TRADE BALANCE

 

The trade balance measures the difference between a country’s exports and imports of goods and services. A surplus (exports > imports) increases demand for the domestic currency, while a deficit (imports > exports) increases its supply.

 

6. GEOPOLITICAL RISKS AND EVENTS

 

Exchange rates are highly sensitive to geopolitical risks and events. These include civil unrest, terrorism, war, natural disasters, or any other disruption to economic stability. Historically, during extended periods of global uncertainty, the US Dollar and the Swiss Franc tend to appreciate.

 

7. COMMODITY PRICES

 

Commodity prices have a direct impact on commodity-linked currencies such as the Australian Dollar (AUD), New Zealand Dollar (NZD), and Canadian Dollar (CAD).

IMF PRIMARY COMMODITY PRICE INDICES

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

 

8. GOVERNMENT BONDS AND YIELDS

 

Yields on fixed-income securities, such as government bonds, often reflect market confidence in an economy. Bond prices fluctuate not only with economic data but also with shifts in market sentiment. Sudden movements in government bond yields can signal significant underlying changes.

 

9. COT (Commitment Of Traders Report)

 

This key report helps Forex traders understand the positions of major institutional players. It is a valuable tool for predicting potential shifts in exchange rates.

□ 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, officially titled the “Summary of Commentary on Current Economic Conditions,” is released eight times a year by the Federal Reserve. It provides an overview of economic activity and includes data on:

• 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

 

The following table compares the fundamental concepts underlying technical and fundamental analysis.

 

Table: Comparing Fundamental & Technical Analysis

FUNDAMENTAL ANALYSIS	TECHNICAL ANALYSIS
Based on hard fundamental data	Based on historical prices
Recognizing the ‘Fair Value’ of financial-traded assets	Identifying the perfect time to enter/exit the market
Used by all Forex investors	Used by all Forex traders
Requires thorough research and a solid understanding of the interest rate and macroeconomic cycle	Requires a solid understanding of concepts like trend identification and support/resistance

 

Final Verdict

 

If fundamental analysis is the market’s "Logical Brain," then technical analysis is its "Soul." The best decisions combine both approaches. Fundamental analysis does not compete with technical analysis; rather, these two forces guide successful investing and precise timing. Savvy investors use fundamental analysis to make decisions and technical analysis to time those decisions.

 

 

■ Fundamental Forex Strategies & Key Fundamental Data

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

January 2020