Fundamental analysis is one of the practices that allows traders to predict price movements with a reduced margin of error. It is complementary to technical analysis. It consists of studying the economic environment and its effect on assets. In Forex trading, fundamental analysis requires an examination of the "external" events that can move the market. In jargon, they are called forex market movers. Here is a list of the most important market movers for Forex trading.
Central Bank Meetings
Central banks (ECB, Fed, Bank of England, etc.) directly influence the value of a currency because, in a nutshell, they decide the quantity in circulation. The main tool through which they exercise this power is the interest rate. If the rate is raised, the quantity is reduced and - by the law of supply and demand - the currency strengthens. If the rate is lowered, the quantity increases and the currency depreciates. Meetings are important because that's where interest rates are decided. Central bank decisions are among the clearest forex market movers traders track.
Inflation Data (Real and Estimated)
Inflation is important for Forex trading because it is the parameter that central banks take into consideration more than any other when setting interest rates. If inflation is higher than expected, markets prepare for a future strengthening of the currency, as an increase in the interest rate is anticipated. If inflation is lower than it should be, conversely, a reduction in the rate is foreshadowed, and a consequent depreciation of the currency.
Statements by Political and Economic Decision-Makers
Investors are guided not only by raw data but also by the "words" of decision-makers. It is crucial, in fact, to act even before the effect is produced... And what better clue than a statement from those who are called upon to decide?
Real Economy Data
Data such as GDP variation, unemployment rate, and industrial production offer precise information about the health of an economy. If an economy is healthy, investors tend to buy its currency, ultimately causing it to strengthen. If an economy is in crisis, investors tend to sell and cause a weakening of the currency. Similar drivers affect other markets, such as the ones covered in four factors that move gold.
Political or Economic Upheavals
When the political and economic context is hit by an unexpected event or a scandal with a significant impact, markets tend to react, at least in the very short term, in a radical way. Prices, including currencies, tend to move with greater volatility. It is therefore necessary, if not to predict (which is really difficult), to take immediate action if a "disruptive" event is looming.
