Forex fundamentals are the basic concepts that all forex traders need to know if they wish to succeed. The three most crucial forex fundamental concepts are:
- Central banks and monetary policy
- Economic indicators
Central banks and monetary policy
The first concept that all forex traders need to understand is central banks and monetary policy. Central banks are the institutions that manage a country’s money supply and interest rates. They use monetary policy to influence the economy, and this has a direct impact on currency values.
Most central banks have an inflation target, using monetary policy to achieve this target. When inflation is low, central banks will typically lower interest rates to encourage economic activity. It makes a country’s currency less attractive to foreign investors, and its value will typically fall. On the other hand, central banks will raise interest rates to discourage economic activity when inflation is high. It makes a country’s currency more attractive to foreign investors, and its value will typically rise.
The monetary policy of the US is set by the Federal Reserve (Fed). The fed has a dual mandate: keep inflation low and stable and promote full employment. The current chair of the fed is Jerome Powell, who President Trump appointed in 2017. Powell is widely considered a dovish (i.e. pre-stimulus) central banker.
The second concept that all forex traders need to understand is economic indicators. They are statistics that show how well the economy is doing. Government agencies and central banks release them, and investors closely watch them.
Here are the most important economic indicators for forex traders are:
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the most important economic indicator. It measures the total amount of goods and services produced in a country. GDP is released quarterly and reported in absolute terms (i.e. dollar value) and as a percentage change from the previous quarter.
Inflation is the second most important economic indicator for forex traders. It measures the average change in prices for all goods and services produced in a country. Inflation is reported monthly, typically reported as a percentage change from the previous month. A widespread measure of inflation is the Consumer Price Index (CPI).
Employment is the third most important economic indicator. It calculates the number of people employed in a country. Employment is reported monthly, typically reported as a percentage change from the previous month. The most common measure of employment is the unemployment rate.
Retail sales are the fourth most important economic indicator. It measures the total value of all sales at retail stores in a country. Retail sales are reported monthly, typically reported as a percentage change from the previous month.
Consumer confidence is the fifth most important economic indicator. It measures how confident consumers are about the economy. Consumer confidence is released monthly, and it is typically reported as a index number (i.e. 100= confident, 50 = neutral, 0 = unconfident).
One of the essential things that forex traders need to remember is that economic indicators are released at different times. GDP, for example, is released quarterly, while inflation and employment are released monthly. It means that forex traders need to be aware of when these indicators are scheduled to be released, and they need to make sure that they adjust their trading strategies accordingly.
Geopolitics is the third and final concept that all forex traders need to understand. Geopolitics is the study of how political events can impact the economy. For example, the Brexit vote in 2016 caused a lot of uncertainty in the markets. It led to a sell-off in riskier assets, such as stocks, and a flight to safe havens, such as government bonds.
Geopolitical events can have an impact on the currency market. If there is a war in a country that produces a lot of oil, this could likely lead to higher oil prices and a weaker currency for that country. Forex traders need to be aware of geopolitical events, and they need to make sure that they adjust their trading strategies accordingly.
It may seem too much to stay on top of, but traders can stay informed by using the multiple market-related news articles published by trusted brokerages, like Saxo Forex Broker.