How to analyze fundamental data in foreign exchange trading

When trading foreign exchange, we should not only pay attention to technical analysis, but also pay attention to fundamental data. So what exactly is fundamental analysis? The main purpose of fundamental analysis is to predict future price movements through the analysis of macroeconomic things. Fundamental analysis factors include various political and economic phenomena such as interest rates, trade balances, inflation rates, civil conflicts, wars and other macro-level things. Fundamental analysis helps us understand how the various political and economic factors mentioned above affect exchange rate fluctuations. Let's introduce a few common economic data:

1. Interest RateAccording to economic principles, interest rate changes are data that directly affect the trend of exchange rates. If interest rates rise, the return on investment invested in the country increases, resulting in a large inflow of international capital, increasing demand for the local currency, bringing pressure on the appreciation of the local currency or directly causing the appreciation of the local currency. Conversely, if interest rates fall, the local currency depreciates. Although a country's interest rates do not change very often, we will find that the exchange rate of each currency pair is constantly changing. This is also affected by the monetary policy statements announced by countries. For example, the United States has maintained an interest rate of 0-0.25% since December 2008, while the US dollar index (the US dollar in the internationalforeign exchange marketThe measure of the strength of the dollar, which is used to measure the strength of the exchange rate, is constantly changing. This is mainly influenced by the 10 monetary policy statements that the Federal Reserve holds throughout the year. Monetary policy statements set out the Fed's expectations for how long it will raise interest rates in the future. If there is a rate hike in the near future, the dollar index rises; if there is still some time before a rate hike, the dollar index falls.

2. Unemployment RateUnemployment rate is an important indicator of capital markets and is a lagging indicator. Unemployment rate% = number of unemployed/(number of people working + number of unemployed) % An increase in unemployment is a signal of economic weakness, which can lead to monetary easing (interest rate cuts or the issuance of domestic currency), a decline in the exchange rate, and a depreciation of the local currency. A decrease in unemployment is a signal of an improvement in the economy, which can lead to monetary tightening (interest rate hikes or the suspension of the issuance of domestic currency), an increase in the exchange rate, and an appreciation of the local currency. Non-agricultural employment (NFP) in the United States is also an important indicator of employment. This data measures changes in employment other than agricultural production, that is, employment in manufacturing and services. A decrease in this data indicates that companies have reduced production, the economy has entered a depression, the exchange rate has declined, and the local On the contrary, the economy develops healthily, the exchange rate rises, and the local currency appreciates.

3. Inflation RateThe inflation rate is the ratio of the excess of money to the actual amount of money needed to reflect the degree of inflation and currency depreciation. Usually we can measure it through the Consumer Price Index (CPI). Currently developed countries such as the United States, the United Kingdom, the Eurozone, and Australia have set 2% as a more appropriate inflation target. Therefore, if the CPI is lower than 2%, the country's central bank will stimulate the economy, adopt monetary easing policies, the exchange rate will decline, and the local currency will depreciate. If the CPI is higher than 2%, monetary tightening policies will be adopted, the exchange rate will rise, and the local currency will appreciate.

4. Gross Domestic Product (GDP)Gross domestic product refers to the value of all final products and services produced in the economy of a country or region over a certain period of time (quarterly and annual), and is often recognized as the best indicator of the state of the country's economy. If the published GDP results are worse than expected, it means that the country's economy is not developing well and needs economic stimulus, the exchange rate is falling, and the local currency is depreciating. If the published results are better than expected, it means that the country's economy is developing well and the local currency is appreciating.

5. Purchasing Managers Index (PMI)The PMI can be divided into manufacturing PMI, services PMI, construction PMI and comprehensive PMI. Since the Australian dollar is influenced by the demand for iron ore, and China is Australia's largest iron ore exporter, its manufacturing PMI reflects the demand for iron ore to some extent. A manufacturing PMI above 50 reflects the overall expansion of the manufacturing industry; a reading below 50 usually reflects a manufacturing recession. Therefore, if China's manufacturing PMI is above 50 and demand for iron ore increases, the Australian dollar may appreciate; conversely, the Australian dollar depreciates. It should also be noted that the timing of the release of economic data on currency movements may vary. At the same time, the release of economic data by the market is not simply "better than expected will rise, worse than expected will fall". Sometimes the market trend has already reflected the impact of the data release in advance, or the actual data is not much different from the predicted data, the market reaction may be very muted. Only when the actual data is very different from the expected data can it cause the market to overreact, thus forming a short-term trend. When there is a unilateral market, such as the long-term decline of the euro/dollar, even if there is good news for the euro, the euro/dollar will still reverse and decline after the short-term rise. Therefore, traders can make judgments based on the data in the market, but they should not only trade based on the data released by the market, but also refer to the currency trend before the data is released, and operate in combination with technical analysis.