There are two main basic forms of analysis used in the stock market: technical analysis and fundamental analysis. Using the technical analysis in forex is easy: price reflects all news, and the charts are the analysis objects. Fundamental analysis is based on balance sheets, but in contrast to the companies, countries don’t have it, so how can a country use this kind of analysis on a currency?
The fundamental analysis concerns the inward investment value, in forex market this type of analysis includes considering the economic conditions that influence the valuation of a national currency.
Economic Indicators are the main factors that affect the currency movement.
Economic indicators are the accounts released by the government or another organization that describe a country's economic activity.
Economic accounts are the mechanisms that measure a country's economic health. It should be noted a great number of factors and policies will influence a nation's economic activity. These accounts are published at scheduled times and provide the market with the information whether a nation's economy is growing or declining. The accounts are very important. In forex, just like in the stock market, any deflection from the norm can increase the price and cause volume movements.
Each indicator has a particular purpose, and is very useful. There are four major reports, some of them can be compared to particular fundamental indicators used by equity investors:
The Gross Domestic Product (GDP)
The GDP is a wide measure of a country's economy, and it shows the total market price of all goods and services that were produced in a country during a year. The advance report and the preliminary report are the reports that are published some time earlier than the final GDP and many traders use them rather than the GDP report.
Considerable revisions between these two reports can cause significant inconstancy. The GDP is equivalent to the gross profit margin of a publicly traded company as they are both the measures of country’s economy internal growth.
Retail Sales
The retail-sales report is the sum of all receipts of all retail outlets in a particular country. This amount is resulting from a varied sample of retail stores throughout a country. The report is important because it is a timely indicator of good consuming adjusted for seasonal variables. It is used in prediction of more important indicators performance and in assessment the economy’s immediate direction. Revisions to advanced reports of retail sales can cause considerable inconstancy.
Industrial Production
This account shows the production changes of the factories, plants and utilities within a given country. It also states their 'capacity utilizations', the maximum level to which the capacity of each of these plants is used. If a country has production increase at this level, it means that it has a successful industry.
Consumer Price Index (CPI)
The consumer price index determines the change of prices of goods in 200 different categories. This account comparing to a country’s exports, can be used to distinguish if a country is gaining or losing on its products and services. One must be very careful in trusting to such reports as the prices her often change according to a currency's strength or weakness. Some other main indicators comprise the purchasing managers index (PMI), producer price index (PPI), durable goods report, employment cost index (ECI), and housing starts.
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