| FUNDAMENTAL ANALYSIS |
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| Aside from technical analysis, another primary approach to analyzing
currency market fluctuations is called fundamental analysis. Fundamental
analysis is the examination of economic indicators, asset markets and
political considerations when evaluating a nation's currency in terms of
another. The key to fundamental analysis is to gather and interpret this
information and act before the information is incorporated into the currency
price. The lag time between an event and its resulting market response
presents a trading opportunity for the fundamentalist. |
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| Here some major fundamental factors that can affect currency prices: |
| 1.Decisions on interest rates made by central banks such as the US
Federal Reserve or the European Central bank (ECB) monthly. |
| 2.Quarterly GDP figures. Only preliminary national GDP figures generally
have the effect of changing market sentiment. |
| 3.Market sentiment data. Market expectations are formed from one week
to two days before the event. Participants establish positions based on
expectations, and realize the results after the figures are released.
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| 4.Political Events. National elections, the September 11th attacks, and
the war in Iraq are examples of events that have affected currency values.
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| 5.Major indices. Inflation indices, Institute of Supply Management (ISM) in
the US and the Purchasing Management Index (PMI) in Europe are also
carefully followed by traders.
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| 6.National industrial production figures. |
| 7.US nonfarm payrolls (indicating new jobs created), Michigan sentiment
figures in the US, the western German business climate or IFO index, and the
Tankan quarterly survey in Japan. |
| There are times that governments through their Central Banks stand in the
way of market forces impacting their currencies, and hence, intervene to keep
currencies from deviating markedly from undesired levels. Currency
interventions have a notable and oftentimes temporary impact on forex
markets. A central bank could undertake unilateral purchases/sales of its
currency against another currency; or engage in concerted intervention in
which it collaborates with other central banks for a much more pronounced
effect. Alternatively, some countries can manage to move their currencies,
merely by hinting, or threatening to intervene. |
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