- Introducing Fundamental Analysis
- What are Economic Indicators?
- Why Economic Indicators affect the market
- A case study on the Brexit
1. Introducing Fundamental Analysis
Fundamental Analysis is the study of the macro economic affects that can affect economies, stocks, FOREX, commodities and companies.
Traders use fundamental analysis to try and forecast future price movements.
In a nutshell, Fundamental Analysis is trying to work out what is the actual intrinsic value of an asset. It’s not technical as it is not looking at levels; it is not looking where people are selling from or buyers are; it is trying to figure out or forecast an intrinsic value of an asset in the short, medium and long term.
2. What are Economic Indicators?
Fundamental Analysis includes, what a lot of people call, Economic Indicators.
Economic Indicators are inclusive of:
•Consumer Price Index
•Employment Figures( NFP)
•Retail Sales
•Industrial Production
•Producer Price Index
•Gross Domestic Product
•Interest Rate Decisions
3. Why Economic Indicators affect the market
Why does Fundamental Analysis matter in the first place?
To answer this question, let’s think of the reason that make one currency stronger than the other. The answer is surprisingly very simple and this is where Economic Indicators come into place.
A STRONG ECONOMY = A STRONG CURRENCY
Economic Indicators can highlight to traders, market commentators and market spectators how strong an actual economy is; how strong that economy is growing; which can have an impact on that currency’s value.
Consumer Price Index
Consumer Price Index is released on a monthly basis and it comes out as a percentage.
Consumer Price Index:
•Measures the change in the price of a basket of goods and services
•It is a key indicator for measuring inflation
•The higher the percentage the higher the chances of the Central Bank raising interest rates
•The lower the percentage the lower the chances of the Central Bank raising interest rates
Retail Sales
Retail Sales is released on a monthly basis and it comes out as a percentage.
Retail Sales:
•Retails sales measure the sale of goods from the retail sector
•If there is growth in Retail Sales it indicates that the economy is growing along side consumer confidence
•A high number could lead to a stronger currency
Gross Domestic Product
Gross Domestic Product is released on a monthly basis and it comes out as a percentage.
Gross Domestic Product:
•Measures the overall health of a country
•A high percentage shows the strength of that country’s economy which could lead to a stronger currency
Non Farm Payroll (NFP)
Non Farm Payroll is released on a monthly basis and it comes out as a thousand (K).
Non Farm Payroll:
•Released usually on the first Friday of the month
•It measures the total number of new jobs from the previous month — not including farm workers
•A high number could lead to a stronger USD
•The NFP can cause extreme volatility
Interest Rate Decisions
Interest Rate Decisions are released around 8 times a year and they come out as a percentage.
Interest Rate Decisions:
•Tightening : When inflation is high and the economy is growing, the Central Bank in question may increase interest rates to encouraging saving and to attempt to lower inflation
•Loosening: When inflation is low and the economy is stagnate, the Central Bank in question will lower interest rates to encourage borrowing and spending
It’s not just economic events and numbers that can affect the markets as we now have Press Conferences and Minutes that can have key impact to the market.
Press Conferences and Minutes
The market monitors press conferences and minutes released by Central banks to try to read in to when they may raise or lower interest rates in the future.
•If the speaker is hawkish, the currency could get stronger
•If the speaker is dovish, the currency could get weaker
•Key Central Banks to watch include:
•FOMC
•ECB, Mario Draghi
•BOE, Mark Carney
To keep on top of this sort of events, one needs to keep and eye on and watch is the Economic Calendar as it will list all the key events coming on the day and through the week.
Pro Tip: At the beginning of the month, make a note of the events that are coming up and when they are due.
Get your fundamentals, including supply and demand, from Market News. Get an idea of what is moving and what is happening, and what headlines are breaking in the market.
4. A case study on the Brexit
Before moving on with the case study James Alexander, the Market Analyst at Wise Banc, has shared his personal trading story about how he stopped fearing Brexit.
“There is something else, which is also driving or potentially could drive the market dramatically at the moment, and that is politics. We saw that with Donald Trump’s surprise election win in November 2016. We saw that with stable election win of Macron when he won the French presidency. Politics and statements made by politicians can affect the currency in general. For obvious reasons, the change in government can change the monetary politics. So, politics can become a part of fundamentals of establishing an intrinsic value in a pair.”
“We’re seeing a dramatic rise against the EUR, against the GBP, which is extremely volatile…”
“… and we’re seeing big moves, of course, in the Pound against the Dollar.”
“A lot of this has been based on the outgoing drama of the Brexit negotiations, which we also see in Indices and how they are being affected, especially the FTSE 100 and DAX 30.”
“Let’s face it, it’s been a real roller coaster for the UK since the 23rd of June 2016, but has it really been doom and gloom for the UK economy so far?
The sterling did indeed initially collapse against its major rivals and although it remains 15% down against the Euro is has regained most of its losses against the USD.
The UK economy grew by 1.8% in 2016. It continued to grow in. So far, in 2018 it fell by 0.1%
Inflation rose dramatically leading the BOE to raise interest rates for the first time in nearly a decade.
Inflation has now stabilized at 2.4% though still above the target.
However, the market is ignoring the fact that the Bank of England is raising interest rates, because they are more concerned about what is happening with the Brexit negotiations. As a prime example, we can see this in what happened back in July when the political upheaval weighted heavy upon the UK markets and with the sterling in particular.
When we had the resignations of David Davis and Boris Johnson, we saw that the GBP dropped dramatically against everything and it became under a lot of pressure. “
“But then, we can change again to what happened in September.”
“Due to the Brexit negotiations that have created a very volatile environment for GBP against all the major pairs, it is truly an exciting opportunity for traders to make a move while keeping an eye on the news and the upcoming events and meetings.
Currently, what the market is waiting to find out is either of these two scenarios: Hard Brexit or Soft Brexit.”
Hard Brexit:
•Goods entering and leaving the UK would face additional controls and check, leading to additional costs
•This would impact the consumers and the stock market
•You could see a repeat of what happened on the night of 23rd June with the GBP crash
•UK stocks would be hit hard
•Companies which receive international currencies would benefit as the USD would gain strength
•FTSE 100 has shown signs of this
Soft Brexit:
•UK would stay part of the Customs Union and the Single Market
•The UK would have a similar relation with the EU as Norway does, which would mean that goods and services would be traded with the EU tariff free
•The UK would be in a position to negotiate trade deals with other countries
•Sterling could rise which could lower UK inflation but with wage growth increasing the Bank of England might raise interest rates quicker than expected leading to more international investment
Important dates
•Early September: Immigration report
•September 30th to October 3rd: Conservative party conference
•18th to 19th October: EU summit
•13th to 14th December: Last European Council
•January to February 2019: Commons approval
•29th March 2019: Brexit day
Did You Know?
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