When it comes to forecasting forex rates, the science of fundamental analysis involves taking into account a variety of relevant economic and political factors for one currency relative to the other currency in each currency pair considered.
A fundamental analyst will review as many of these items as possible on a regular basis for each currency and then compare the two to obtain a forecast. Generally, such forecasts are not specific objective numbers for the exchange rate, but instead an overall directional outlook on the currency pair.
For example, their outlook might be positive, negative or neutral after the analysis. This would mean that the analyst expects the exchange rate for the currency pair to rise, fall or stay roughly constant respectively.
Furthermore, when some new fundamental information enters the forex market in a sudden way, it can prompt significant market moves and volatility as traders react to the new information. At such times, one of the most basic assumptions of technical analysis - the idea that "price discounts all" - breaks down until the new information has been duly assimilated.
If you have a trading system based on purely technical indicators this is really important, as a number of key fundamental factors can and often do influence market moves, which may produce unexpected results when trading using systems based on technical analysis.
As a result, it really pays to know what the likely effects of such key fundamental information could be so that a quick assessment of probably future direction can be made.
The types of fundamental data items which will most impact a country's currency along with a brief description of its likely effect include the following:
Many forex traders perform a daily review of economic calendars for the currency pairs they maintain positions in. They do so since the release of such key information can often result in considerable short term volatility in the currency market, as well as prompt shifts in market sentiment.
A list of key economic factors that are routinely covered in the current news and which can move the market when they are released includes the following:
Combining fundamental news analysis along with technical analysis offers the trader the best of both worlds and will minimize surprises while trading.
Some traders purposefully avoid trading on days with economic releases because the market may become temporarily volatile only to settle back towards the original trend.
Also, technical forex traders might avoid known risk events like major economic data releases since one of the key assumptions of technical analysis: "Price Discounts All" tends to break down during the period immediately after the announcement as the new information is assimilated into the price.
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