What affects the price of currencies in the Forex market? With fundamental analysis traders try to predict the effect, which will have social, economic and political events in foreign exchange quotations.
Macroeconomic factors are the key in this study. All significant data is involved: from unemployment rates and inflation to interest rates and industrial production. Based on analysis of the available economic data the trader takes a profitable position.
In connection with the development of the modern Internet it is now much easier for a trader to be aware of important events. Many special online sources supply users with streaming news and market commentary. During analysis, a trader should focus on the following three factors:
1. Unemployment rate.
It is a primary indicator of economic strength. When unemployment is high, it means that the economy is weak, and that it does not have enough resources to provide people with jobs. In turn, this leads to a decrease in the value of a national currency.
2. Interest rates.
Each country has its interest rate set by the local central bank. If inflation is too high, the central bank may well increase the rate to cool economic climate. On the other hand, if the economy will grow slowly, interest rates may be reduced in order to stimulate growth.
Lower rates often lead to a decrease in the exchange rate. It attracts those traders who prefer to sell a currency with low interest rates, while buying another with a high rate.
3. Geopolitical events.
It can be a very important factor in determining the behavior of the currency. Consider May 2005 as an example. There was a rumor that France will vote against the EU Constitution. Since France is crucial for the health of Europe's economy, traders began to sell Euros and buy American dollars.
Subsequently, it has pushed the EUR to decline. Traders were right. France, after all, voted against the Constitution, with the result that the EURUSD has fallen to more than 400 points over the 3 days. Whoever sold the euro, gained thousands, and those who bought, lost quite considerable sums of money.