Fundamental Analysis (Part 1) - Introduction and US Figures

Overview
Fundamental analysis considers how global economic news and other events impact financial markets. For example, on a country level, if monetary policies were amended for the benefit of the country’s economy, then it indicates that its currency should gain strength, thus encouraging investors to trade it. Likewise, relatively higher interest rates are generally enticing for investors as they are attracted to assets denominated in the country’s currency, which leads to increased demand, thus boosting its value.
outcome

What is fundamental analysis, and what indicators does it consider?

Reading time
10 minutes
Experience Level
  • beginner Beginner

Major Economic Figures Relevant to Foreign Exchange (Forex) Markets


Below are some of the most important economic figures that affect Forex price movements. Some of these events are typically issued at a specific periodic date (e.g., monthly, quarterly,) which is why you need to either memorize the usual dates or check the economic calendar daily.

Generally, economic indicators are split into three categories, based on the nature of the data and the part of the economy it covers.

Leading Indicators: Leading indicators are those that could help in predicting market trends and point to economic adjustments and events before they happen (e.g. bond yields).

Lagging Indicators: Lagging indicators reflect historical data and serve to confirm economic trends and patterns (e.g. consumer price index).

Coincident Indicators: These indicators generally have a large role in the economy and are scrutinized as they release (e.g. gross domestic product).


United States Economy Figures


Gross Domestic Product (GDP)


It is defined as the overall monetary value of all produced goods and services in a specific country during a specified period of time. The GDP estimates are released at 8:30 a.m. Eastern Time on the last Thursday of each month, reflecting the previous quarter’s activity.

The first (advance) estimate is released in the first month after the quarter ends. A second revised reading is released in the following month, and a third final estimate is released in the month after.
 

Trade Balance


It is a lagging indicator that measures the difference between imports and exports of tangible goods and services.

Generally, a trade surplus is preferred but the U.S. economy consumers take advantage of cheaper imported goods a lot more than national manufactured goods.

On that account, a declining trade deficit for the U.S. economy is considered a supporting sign to the U.S. dollar.

Consumer Price Index (CPI)


Considered as a lagging indicator, it is the main inflation figure measuring the change in the cost of a bundle of consumer goods and services both on monthly basis (MoM) and an annual basis (YoY). It is released at 8:30 a.m. Eastern Time during the second full week of each month, reflecting the previous month’s data.

The shift in price levels reflects a lot of underlying changes in the economy, therefore, the CPI is a major factor in deciding the Monetary Policy. Additionally, the Forex market is highly affected by the CPI data and what it means for the future of price level. It is also a factor in long-term investment, and changes in the price level often affect the behavior of long-term investors in fixed income (bonds) and commodities markets.
 

Producer Index Data (PPI)


Similar to the CPI, the PPI measures inflation by measuring the price of goods at the wholesale level or how much producers are paying for the goods they use in production. This report is released at 8:30 a.m. Eastern Time during the second full week of each month, reflecting the previous month’s data.

The Institute for Supply Management (ISM) Report on Manufacturing and Services


The ISM releases monthly surveys on the state of the services and manufacturing sector that are considered a gauge of current and future U.S. economic conditions.

The ISM surveys purchasing managers and senior executives at over 400 companies across 19 primary industries. The index comes out in the first week of each month.

Monthly Jobs Report


The markets consider this one to be the most anticipated report of all. It is usually released on the first Friday of each month at 8:30 a.m. Eastern Time. The headline figure in this report is the non-farm payrolls (NFP), which reflects the number of jobs created or lost during one month, ending in the middle of the previous month. The number includes changes in almost all sectors of the economy, government jobs, and private-sector jobs, which are divided into manufacturing jobs, service sector jobs, and so on. We said “almost” because there is a small number of sectors that are not included in this report. On the top of the list, there are farming (hence the name) and non-profit organizations.

There are other notable numbers included in the report such as the unemployment rate – which discloses the percentage of the unemployed workforce – and the average worked hours per week, as well as the average hourly earnings.

The data released in this report reflects the health of the whole economy, as well as employer sentiment around the future of business conditions as it shows their willingness to add more to their payroll.

Durable Goods Orders


Durable goods are those that should last more than three years. Consumers tend to spend more on these goods when they are doing good financially and when their expectations for the economy are positive. Thus, a positive number can be viewed as both a statement that the economy is in good shape and as an indication of positive future sentiment by consumers, and thus is considered a leading indicator.

Retail Sales Index


This leading indicator measures goods sold within the retail industry, whether by large chains or small stores.

In general, improving retail sales mean an improving economy. Retail sales data present insight into employment, manufacturing, services, and inventory, and directly affects the headline GDP number.

Housing Sector Indictors


Housing statistics are one of the most important leading indicators for the economy. Building permits show the annualized number of new homes under construction during a month. Other numbers include new home sales and existing home sales. These releases provide a look into how credit and lending conditions, construction jobs, and homebuyers trust in the outlook of the economy.

Interest Rates


Interest rates are the most important factors affecting the Forex markets.

Short-term interest rates are set by the central bank in countries using a centralized banking model to control the economy’s money supply and borrowing conditions.

Lower interest rates lead to better growth prospects for the economy but will increase inflation levels. Higher interest rates make it more attractive to deposit funds and reduce borrowing and spending money.

In the United States, the authority over Monetary Policy is in the hands of the Federal Reserve, or as traders like to call it, the FED. The Federal Open Market Committee (FOMC) meets eight times a year, once every six or seven weeks. The meetings are held for two days, always on Tuesday and Wednesday, and the decisions are always announced at 2:00 p.m. Eastern Time on the second day of the meeting, which is Wednesday.

30 minutes after the decisions are announced, the FED Chair holds a press conference, in which they read the Monetary Policy statement first, then answer questions from journalists.
 
The FED’s interest rate decisions and forecasts are closely watched since they show the current and future economic conditions. Higher interest rates expectations are positive for the currency.

If needed, the FED can meet urgently, like when there is a financial crisis or a pandemic.

The Stock Market


Although it is not an economic release, it is still considered a leading indicator and is more closely watched than most other indicators.

A change in stock prices is based on market expectations on how listed companies will perform in future earnings and growth. A rise in stock markets indicates stronger earnings estimates and vice versa.

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