Fundamental analysis in Forex includes studying a country’s economy to determine its influence on the currency. If a trader understands the correlation between the economy and its currency price, they can determine demand, increase or decrease in the value of a particular currency.

Economic Indicators Help Assess the Economy

There are certain economic indicators, in the form of reports. A trader can review them to determine the strength of the economy. These reports are released by independent entities and the government, which collect data and analyze them before the reports are published. Reports are released at specific times weekly, quarterly, monthly, or annually, depending on the type.

Traders usually look at the latest results in each report and the changes that have occurred since the last published report.

Economic Reports and News Affect Currency Value

A strong economy is likely to provide opportunities for business, including profits from stock markets, real estate, and other enterprises.

Therefore, if an economic report identifies a country’s economy as strong, both domestic and foreign investors (corporations and individuals) will seek investment opportunities in that country.

To invest capital in a country, an investor must do so in the local currency. If the economy brings significant profits for investments, then the demand for the local currency will rise, and its price will also increase.

Export of Goods and Services Influences Currency Price

If a specific segment of the economy (such as financial services or manufacturing) is strong, it will export financial services or goods abroad.

Consumers of these services or goods need to convert their domestic currency into the local currency of the producing country. The higher the demand for services or goods, the greater the demand for the local currency. This means its value will increase.

Financial Markets React to News

When economic reports are released, there are various assumptions about the results. Forex traders buy and sell currencies in anticipation. For example, if bad results are expected, traders try to sell the currency before the release, thereby causing the price to drop.

When this happens, it’s called the markets “pricing in”. This means that by the time the event happens, the price has changed as previously expected.

When the data is released and matches expectations, the impact on price movements is usually minimal. However, if the report result significantly deviates from expectations, volatile price movements can occur. This is because traders are trying to cope with fresh and unexpected results.

Publication Time is Often Announced in Advance

You can use an economic calendar to know about the publication of economic reports. The news publication dates are known in advance, so you can keep track of them. Financial markets are often stirred up by unforeseen events. They can quickly make the price volatile and may even change the direction of the trend.

Rapid Price Movement Can Occur During News Release

The initial reaction in currency markets after news release can be volatile, as organizations try to avoid opening new positions during the news release and close short-term positions ahead of it. Therefore, the liquidity of the currency pair and asset decreases. After the release (for example, US non-farm Payroll), the currency pair can quickly change in both directions and make trading conditions complex.