Many fundamental factors affect currency value. Therefore, whether we trade based on technical analysis fundamental analysis, we should know these factors to understand the currency markets.
Important Fundamental Factors That Affect Currency Values
Fundamental factors are economic releases and events that have a direct impact on currency value. If we want to trade based on fundamental analysis, we should focus on these releases and make a decision based on the result. Let’s have a look at the important fundamental factors that affect currency values
Interest rate is the amount that a central bank charges if anyone takes loans from the bank. Central banks change the interest rate to control the country’s money supply; therefore, it directly affects the currency value.
Inflation is the buying power of money. Lower inflation means higher buying power, and higher inflation, the lower buying power.
Consumer Price Index (CPI)
CPI or CPI inflation is the price of consumer needs. Any increase in CPI is bad for the currency, while a decrease in CPI is good for the currency.
Producer Price Index (PPI)
PPI is the price of products or elements of businesses. An increase in PPI means businesses need additional money to buy raw materials that may increase the finish product rate.
Retail sales indicate the number of products and services bought by consumers. An increase in retail sales indicates higher consumer activity in the market that is good for the currency value.
Foreign Exchange reserve
Foreign exchange reserve is the amount of money that is reserved in the central bank. An increase in foreign reserves is positive for a country’s economy and currency value.
Non-Farm Payroll (NFP)
On the first Friday of every month, US Labor Statistics releases the number of unemployed persons in the USA. As the US dollar is the most used currency globally, any change in NFP affects the overall forex market.
Central Bank Meets
In every quarter, central banks of every country provide an outlook of the domestic and international economy. In this meeting, any hawkish tone creates a positive impact on the currency value, while any dovish tone creates a negative impact on the currency value. We should keep an eye on how central banks are reacting to the central banks meeting to get an outlook of the currency value.
Besides the above-mentioned fundamental factors, there is a political movement, trade natural disaster, etc. also impacts the currency market. Moreover, in an uncertain market condition, no trading strategy works well, whether based on technical or fundamental analysis. Let’s dig deeper into each of these fundamental factors and more interesting aspects in the upcoming lessons. Cheers.