Tag: PPI

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Forex Course

152. Knowing The Fundamental Factors That Affect The Currency Values

Introduction

Introduction

Introduction

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

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 Rate

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

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.

Conclusion

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.

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Forex Fundamental Analysis

What is Producer Prices Change and what should you know about it?

Introduction

Introduction

Introduction

For forex traders, the producer prices change come as an afterthought. The changes in the prices of the output by domestic producers is a vital macroeconomic indicator since it is considered a leading indicator of inflation. Therefore, understanding how these changes impact the economy, the rate of inflation, and the currency can be useful to forex traders.

Understanding Producer Prices Change

Producer prices change in the United States is measured using the producer price index (PPI). The PPI is a weighted index that measures the change in the price of finished goods and services sold by producers.

The consumer price index is the most cited metric for measuring inflation. However, PPI can be used as a measure of inflation; because it tracks the changes in prices from the perspective of producers. CPI tracks price changes from the consumers’ perspective. Therefore, PPI can be used as the foremost tracker of inflation since it measures the changes in the prices of output before it is distributed to the consumers. PPI can be considered to the purest change in the prices of output since it does not include the changes caused by sales taxes and mark-ups by retailers. Hence, PPI is predictive of the CPI, as shown by the correlation in the chart below.

Source: St. Louis FRED

Since the PPI does not represent the general and final changes in the prices of goods and services in an economy, it is regarded as a weak economic indicator in the forex market.

How PPI is measured

Although the PPI is quoted as the change in the price of the producers’ output, it is measured in three distinct stages based on the level of production. They include the PPI Commodity Index, which measures the changes in the price of input materials, PPI Processing Index, which measures the changes in the price of intermediate goods, and Core PPI, which measures the finished output.

It is worth noting that the prices of food and energy are considered to be highly volatile and are therefore not included in the computation of the core PPI. This omission is justified by the fact that their prices are reliant on the short term supply and demand, which makes it difficult to compare these prices in the long-run.

As mentioned earlier, PPI is a weighted index. Weighting means the size and importance of the items sampled are used. The changes in prices compared to those of 1982 as the base year.

How can the PPI be used for analysis?

The inflation data is among the most-watched economic indicators because the rate of inflation informs the monetary and fiscal policies in a country. Being a leading indicator for the CPI, the PPI serves an important role. This role is precipitated by the fact that inflation is one of the primary drivers of monetary and fiscal policies.

Rising inflation signifies the availability of cheap money, which encourages spending and investments. The Federal Reserve then raises interest rates to reduce the amount of money in circulation. At higher interest rates, borrowing money becomes expensive hence reducing consumption. Similarly, it becomes lucrative for households to save money since they earn more. Postponing consumption tends to reduce the amount of money I circulation hence lower rates of inflation.

Inarguably, low rates of inflation result in a stagnant economy. Although inflation is good for the economy, when it gets out of hand, it results in a rapid depreciation of a country’s currency. It is for this reason that the central banks use interest rate policies to set the desired maximum and minimum inflation rate. In the US, for example, the Federal Reserve has set the country’s inflation target at an average of 2%.

An increase in the PPI signifies that the overall rate of the CPI will also increase. This increase will reduce the purchasing power of the country’s currency since the same amount of money will afford a lesser quantity of goods and services. Therefore, an increasing rate of inflation encourages consumption within an economy because savers will be afraid that their money will lose value.

This increased consumption leads to growth within an economy. Conversely, a decreasing PPI signifies that the overall inflation is likely to reduce. This reduction, in turn, encourages people to save their money hence reducing the rate of consumption in an economy.

Inflation can result in a feedback loop. Hence, rising inflation will encourage more expenditure and investment in an economy leading to further inflation. This feedback loop occurs when savers opt for consumption to avoid the depreciation of their money; this, in turn, increases the amount of money in circulation, which causes the purchasing power of money even to reduce further.

Impact on Currency

The end goal for any forex trader is to establish whether a change in any fundamental indicator will lead to an interest rate hike or cuts. This anticipation is what primarily impacts the price action in the forex market.

A rising PPI  signifies rising inflation, which would be accompanied by an increase in the interest rates. Since the increasing interest rate is good for the currency, an increase in PPI results in appreciation of the currency relative to others.

Conversely, dropping levels of PPI signifies that the overall rate of inflation will fall. Therefore, a steadily dropping PPI forestall a drop in the interest rate. Therefore, decreasing levels of PPI leads to a depreciating currency.

Sources of Producer Price Changes

The producer price changes data can be accessed from the US Bureau of Labor Statistics, along with the monthly updates. A comprehensive look into the US PPI data can also be accessed from St. Louis FRED website. Statistics on global producer price changes can be accessed at Trading Economics.

How PPI Data Release Affects The Forex Price Charts

The most recent PPI data was released on August 11, 2020, and can be seen at Forex factory here. A more in-depth review of the PPI report from the Bureau of Labor Statistics can be accessed at the BLS website.

As can be seen, both the monthly PPI and core PPI data are expected to have a high impact on the USD upon release.

The screengrab below shows the most recent changes in the MoM PPI and core PPI in the US. In July 2020, the monthly PPI increased by 0.5% compared to a 0.3% decrease in June. The core PPI increased by 0.6% in July compared to a 0.2% decrease in June. Both changes in the MoM PPI and core PPI were better than analysts’ expectations of 0.1% and 0.3% increase, respectively.

Now, let’s see how this release made an impact on the Forex price charts of a few selected pairs.

EUR/USD: Before Monthly PPI Release on August 11, 2020, 
Just Before 8.30 AM ET

As can be seen from the above 15-minute chart of EUR/USD, the pair was on a steady uptrend before the release of PPI data. This trend is evidenced by candles forming above the steeply rising 20-period MA. However, 30 minutes before the release, the steady uptrend tapered with the 20-period MA peaking.

EUR/USD: After Monthly PPI Release on August 11, 2020, 
at 8.30 AM ET

After the PPI data release, the pair formed a 15-minute bullish candle followed by a period of volatility. The pair later adopted a bearish trading pattern with the 20-period MA steadily sloping downwards, showing that the USD became stronger as expected.

Now let’s see how this news release impacted other major currency pairs.

GBP/USD: Before Monthly PPI Release on August 11, 2020, 
Just Before 8.30 AM ET

Before the news release, the GBP/USD pair showed a similar steady uptrend as observed with the EUR/USD pair. As seen above, the 20-period MA is steeply rising with candles forming above it.

GBP/USD: After Monthly PPI Release on August 11, 2020, 
at 8.30 AM ET

After the PPI release, the pair formed a 15-minute bullish “hammer” candle. As with the EUR/USD, the pair subsequently reversed the uptrend and traded in a steady downtrend, the 20-period MA sloping downwards.

AUD/USD: Before Monthly PPI Release on August 11, 2020, 
Just Before 8.30 AM ET

AUD/USD: After Monthly PPI Release on August 11, 2020, 
at 8.30 AM ET

Unlike the strong uptrend observed with the EUR/USD and GBP/USD pairs, the AUD/USD pair traded in a weak uptrend before the PPI data release. This trend is evidenced by candles forming just around the slightly rising 20-period MA. After the news release, the pair formed a 15-minute “bearish Doji” candle signifying a period of volatility. The pair subsequently reversed the trend adopting a steady bearish stance with the 20-period MA sloping downwards.

Bottom Line

Although the PPI is a relatively low impact fundamental indicator compared to the CPI, this analysis has proved that its release has a significant impact on the price action. Forex traders should avoid having any significant positions open before the release of the PPI.

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Forex Fundamental Analysis

‘Producer Price Index’ & The Degree Of Its Impact On The Forex Charts

Introduction

Introduction

Introduction

Producer Price Index PPI, which sounds very similar to the Consumer Price Index CPI is also an equally important indicator. It is widely used as a leading indicator to predict the upcoming CPI and thereby draw economic conclusions accordingly ahead of time. Hence, understanding the Producer Price Index, its history, and the resultant effect it has on the market is significant for traders who trade on Fundamental Analysis.

What is the Producer Price Index?

As the name suggests, the calculation of this index is from the viewpoint of the Producer, i.e., a manufacturer or maker of goods and services. Producer Price Index, in the simplest sense, measures the average of the selling prices of the goods and services at the manufacturing end place. In other words, it is the average of the prices at which the manufacturer sells his products and services to the retailers, who then take it to the local markets and make it available to the general public.

Understanding the difference between what Producer Price Index and Consumer Price Index represent is the key here. Consumer Price Index CPI represents the cost at which goods and services are made available to the general public. Hence, CPI is the measure of average weighed in COST PRICE of finished goods while the Producer Price Index represents the weighted average of SELLING PRICE of the manufactured goods. CPI represents what the end consumer or customer pays, and PPI represents what the manufacturer receives for his commodities.

An item when manufactured and sold from the place where it got manufactured incurs certain costs before it reaches the end consumer. These costs include transportation fees, some specific goods & service taxes, storage costs, etc. Hence, Producer Price is a more rudimentary or cruder form of CPI, and there is an inherent correlation between both. For this reason, PPI is considered an advanced signaling tool to assess CPI and make informed economic decisions by various groups.

How is the Producer Price Index PPI calculated?

The Bureau of Labor Statistics (BLS) surveys almost all industries in the goods manufacturing section and a majority of service sectors. This organization continues to include more and more divisions as time progresses. Producer Price Index of BLS is calculated by first collecting data from all the listed industries by field economists. These people collect data through various means like an onsite visit, phone calls, or even emails, etc.

The producer Price Index uses an altered version of the Laspeyres index. For any given set of goods, it compares the base period revenue to the current period revenue.

Producer Price Index =  (∑QoPo(Pi/Po)) / (∑QoPo)  ×100
  • Qo: Commodity Quantity shipped in the base period
  • Po: Commodity Price in the base period
  • Pi: Commodity Price in the current period

The above equation tells clearly that based on size & importance, items are weighted. The base price corresponds to 100 for which the base year corresponds to 1982. The PPI is published as a percentage increase or decrease with regards to the previously released number, which may be monthly, quarterly, and annually.

Why is the Producer Price Index important?

CPI measures consumer inflation, and PPI measures business inflation. The significance of the Producer Price Index is many-fold. First are the range and history of the data. The index data set goes way back in time. For example, PPIFGS (Producer Price Index by Commodity for Finished Goods) goes as far back as 1947. With such huge data, the reliability of the data set is high, and it usually depicts the macroeconomic picture of country and industrial health with good confidence.

Also, The PPI program is the oldest continuous series of the Federal Government going back to 1902. Second is the frequency & direct ground-level nature of the statistic meaning this data is a real-time reflection of the current industrial health. Thirdly, PPI is very closely related to CPI in the sense that it is an index of the same goods at an earlier stage of the life cycle.

While CPI shows the stats for a product at the near-end of its transaction life cycle in terms of changing hands, PPI shows the stats at the first transaction life cycle, which is very helpful. In this Index, there are many subcategories, wherein certain goods and services get included or excluded from the basket to give a more accurate picture of the concerning market in absolute or relative terms. For example, PPILFE Producer Price Index Excluding Food & Energy (Core PPI) strips away food, gas, and oil prices from the equation whose prices are volatile and measures the absolute changes.

How can the Producer Price Index be Used for Analysis?

The range of PPI is such that there is something for everyone here. Narrowing down into the PPI, any industry can be analyzed. Broadly there are three most popular classifications:

Industry classification: Here, groupings of commodities are done based on the industry sector they represent. The PPI releases about 535 indexes with more than four thousand specific product lines and product category sub-indexes.

Commodity classification: Here, the grouping of items is done based on the similarity of goods and services in terms of their making.

Commodity-based Final Demand-Intermediate Demand (FD-ID): Here, Based on the consumer group, the commodities are classified and are one of the most used PPI stats.

Due to the diversity in the statistics, different sectors of economists can isolate and use the Producer Price Index for their purposes.

Producer Price Index is a widely used indicator for predicting Consumer Price Index. Manufacturers and Industrialists also use these PPI to adjust pricing on the goods and services they buy and sell to fellow manufacturers to avoid having fixed pricing or unfair price changes during the duration of their business contract, which usually tends to be very long periods.

Sources of Producer Price Index

The U.S. Bureau of Labor Statistics releases all the indexes as mentioned above here

You can also find out the same indexes along with many others with a comprehensive summary and statistics of various categories on the St. Louis Fed website.

Impact of PPI’s news release on the Forex market 

After understanding the definition and significance of the Producer Price Index (PPI) in an economy, we shall look at its importance on price charts. For analysis purposes, we have taken the PPI data of Japan, where the survey responses from large Japanese manufactures provide the data for the report. Even though the PPI is a key indicator of the manufacturing sector of the economy, currency traders do not consider it to be the most important indicator of the overall economy. The below image The Business Manufacturing Index (BSI), along with PPI, measures the business sentiment in manufacturing.

The PPI data is released by ‘Bank of Japan’ that measures the change in selling prices of goods purchased by Japanese Corporations. A higher than expected PPI is considered to be positive for the currency and vice versa. The PPI data is released on a monthly, quarterly, and yearly basis, but the highest importance is given to the year-on-year data. The below image shows the latest year-on-year PPI data of Japan that was released in the month of March. As we can see, there is so much variation in the data from ‘previous’ to ‘forecasted to the ‘actual.’ This means, there are many other factors that influence the manufacturing industry that it is difficult to measure for the economists.

EUR/JPY | Before The Announcement

The above chart is that of EUR/JPY, and since the Japanese Yen is on the right-hand side, a down-trending market indicates the strength of the Japanese Yen. The reason behind this downtrend before the news release is because of the bullish expectation of the PPI data from market players. Traders have already forecasted the PPI to be around 1%, which 0.5% lower than the previous reading. Since it is lower, we should expect weakness in the Japanese Yen, but 1% seems to be a good PPI figure for the Japanese economy, hence the downtrend. We need to remember that a higher PPI data is not compulsory to take the currency higher, but rather sometimes the data alone plays importance.

EUR/JPY | After The Announcement

After the PPI numbers are announced, the price barely goes above the moving average line, and there is not much change in the volatility. As the PPI is not an impactful event, the volatility is as expected. A reduction in PPI is bad for the currency, but even though the PPI was reduced, the Japanese yen did not get weak. Therefore, we should just not be paying attention to the news but also use technical analysis to take trades. In this example, we can go long in the market only if we get ‘reversal’ signs, but we don’t see any such patterns. Thus, we should be looking for trend continuation patterns and join the downtrend.

GBP/JPY | Before The Announcement

  

GBP/JPY | After The Announcement

The above image represents the GBP/JPY currency pair, which shows similar characteristics as that of EUR/JPY, where the downtrend is much stronger than the latter. Since the downtrend is prominent, only a much worse PPI than before can take the currency higher. Even if the PPI was very low, the uptrend would not last as it is not an important measurement of the economy. After the news announcement, there is hardly any effect on the currency pair, and the volatility is in the same range. The PPI data was almost the same as that was forecasted by traders, and we can say that it was as per the market expectations. This made the Japanese Yen to strengthen more and downtrend extended on the downside after a bit of consolidation. Once the market slips below the moving average, a ‘short’ trade can be taken with a stop loss above the ‘news candle.’

USD/JPY | Before The Announcement

  

USD/JPY | After The Announcement

This is the USD/JPY currency pair, where the chart characteristics are a little different than the above two charts. Here we don’t really witness a downtrend but rather a ranging nature of the market. Since we are near the resistance area, any positive news release should be taken as an opportunity to ‘short’ in this pair. This is the way we should combine fundamentals with technical analysis. After the news is released, we don’t see any change in the volatility, and the ‘news candle’ leaves a wick on the top. The PPI data was again positive for the Japanese Yen, where the price crashed right after the ‘news candle.’

That’s about PPI and how the Forex price charts get affected during the news release of this fundamental indicator. Let us know if you have any questions in the comments below. Cheers!

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Forex Fundamental Analysis

What Is ‘Inflation Rate’ & Why Is It One Of The Most Important Fundamental Indicators?

Introduction

Introduction

Introduction

Based on the current inflation rate and future monetary policies, we can effectively gauge the current economic situation of a country. Using the Inflation rate data, we can also get an insight into the current currency’s value and in which direction the economy is heading towards. Hence we must look at this key indicator in its depth to solidify our fundamental analysis.

What is Inflation?

In Economics, Inflation is the increase in the prices of goods & services, and the resultant fall in the purchasing power of a currency. What this means, in general, is that when a country experiences Inflation, the prices of the most commonly used goods & services by the citizens of a country increase. Because of this, the average person has to spend more money to buy the same amount of goods which cost less in the previous period.

For instance, if John went to a grocery store to purchase his monthly groceries, and it cost him 100$ in 2018. Next year, i.e., in 2019, John goes to the same store to buy the same set of goods, and it had cost him 105$. Now John either has to remove some items or pay more to make the same purchase. Here John has experienced Inflation of 5%.

What is Inflation Rate?

The percentage increase in the price of goods & services over a period (usually monthly or yearly) is called the Inflation Rate. In our previous example of John, we see we have an inflation rate of 5%.

Inflation Rate is compounding in nature, i.e., it is always calculated with reference to the most recent statistic and not any particular base year or a base inflation rate. For example, if John were to buy the same goods in 2020, if it costs him 110$, then John has experienced 4.54% of Inflation and not 10% inflation.

Why is Inflation Rate important?

Inflation, in general, when kept in check, is good for an economy as it fuels growth. The increase in the prices of common goods and services means people have to compete and work better to earn more to meet their needs. But as in any case, excess or high Inflation can be crippling for an economy.

Because the citizens of the country get poorer when the purchasing power of the currency falls due to a high increase in prices, inflation Rates can be used to gauge the current financial health of an economy and what the citizens of a country are currently experiencing.

How does Inflation Occur?

A general view in the economic sector is that steady Inflation occurs when the money supply in the country outpaces economic growth. It means more currency is being circulated into the economy than its equivalent activity (revenue-generating practices). Inflation occurs mainly due to the rise in prices. But in brief, Inflation can occur due to the following situations:

Demand-Supply Gap: When the demand for a particular good is higher than the supply or production of the same, then there is a natural surge in the price of that good.

Increased Money Supply: When more money is in circulation in the economy, it means an individual has more disposable cash. This increases consumer spending due to a positive future sentiment resulting in increased demand, which ultimately increases the price of goods.

Cost-Push Effect: When the cost of inputs to the process of manufacturing good increases, it coherently increases the overall cost of the finished good. This results in a higher selling price of goods, which ultimately results in Inflation.

Built-In: Built-in inflation happens when there is a sort of feedback loop in the prices of goods and incomes of people. As people demand higher wages to meet the needs, it results in higher prices of goods and services to fund their demand and vice-versa. This adaptive price and wage adjustment automatically feed off each other and result in an increase in prices.

How is Inflation measured?

Based on different sectors, the costs of different sets of goods & services are used to calculate different inflation indexes. However, there are some most commonly used inflation indices in the market, like the Consumer Price Index (CPI) and Producer Price Index (PPI) in the United States.

Consumer Price Index (CPI): The Bureau of Labor Statistics (BLS) surveys the prices of 80,000 consumer items to create the Index and publishes it on a monthly basis. It is a measure of an aggregate price level of most commonly purchased goods and services like food, shelter, clothing, and transportation fares. Service fees like water and sewer service, sales taxes by the urban population, which represent 87% of the US population, are weighted into the percentage, based on their importance in terms of need.

Changes in CPI are used to ascertain the retail-price changes associated with the Cost of Living, and hence it is used widely to assess Inflation in the USA. In this Index, there are many subcategories wherein certain goods are either included or excluded to give a more accurate picture of Inflation in absolute or relative terms. For example, Core CPI strips away food, gas, and oil prices from the equation whose prices are volatile in nature.

Producer Price Index (PPI): It measures the average change in the selling prices received by domestic producers for their output over a period of time (usually monthly). Unlike CPI, which measures retail prices from the viewpoint of end customers who purchase the items, PPI measures the prices at which goods and services are sold to outlets from the manufacturer. PPI measures the first commercial transaction, and hence it does not include the various taxes and service costs that are associated and built into the CPI.

PPI vs. CPI

PPI measures the change in average prices that an initial-producer or manufacturer receives whilst CPI estimates the change in average prices that an end-consumer pays out. The prices received by the producers differ from the prices paid by the end-consumers, on the basis of a variety of factors like taxes, trade, transport cost, and distribution margin, etc.

Sources of Inflation Indexes

The US Bureau of Labor Statistics releases all the above-mentioned indexes here:

Consumer Price Index | Producer Price Index 

Inflation Rates of some of the major economies can be found below.

United Kingdom | Australia | United States | Switzerland | Euro Area | Canada | Japan 

How ”Inflation Rate” News Release Affects The Price Charts?

In this section of the article, we shall find out how the Inflation rate news announcement will impact the US Dollar and notice the change in volatility after the news is released. As discussed above, CPI is a well-known indicator of Inflation as it measures the change in the price of goods and services consumed by households. Therefore, the data which we should be paying attention to is the CPI values and analyze its numbers. We can see that the Inflation Rate does have a high impact on the currency of the respective country.

Below, we can see the month-on-month numbers of CPI, which is released by the US Bureau of Labor Statistics. The data shows that the CPI was increased by 0.1% compared to the previous month, which is exactly what the analysts forecasted.

Now, let’s see how this news release made an impact on the Forex price charts.

USD/JPY | Before The Announcement - (Feb 13th, 2020)

On the chart, we have plotted a 20 ”period” Moving Average to give us a clear direction of the market. From the above chart, it is clear that the US Dollar is in a strong downtrend, which is also evident from the fact that the price remains below the ”Moving Average” throughout. Just before the news announcement, we see a ranging action, which means the market is in a confused state.

Now we have two options with us, one, to ”long” in the market if there is a sudden large movement on the upside and, two, to take advantage of the volatility in either direction by trading in ”options.” We recommend to go with the first option only if you have a large risk appetite, else choose the second option by not having any directional bias. Let us see which of the above options will be suitable after the news announcement is made.

USD/JPY | After The Announcement - (Feb 13th, 2020)

After the CPI numbers are announced, we see that the price does not go up by a lot, and it creates a spike on the top and falls below the moving average. It is very apparent that the news did not create the expected volatility in the above currency pair. From the trading point of view, in the two options discussed above, the first one is completely ruled out as the market did not show a strong bullish sign, and if we had gone with the second option, we would land in no-loss/no-profit situation.

The reason for extremely low volatility after the news announcement can be explained by the fact that the CPI numbers were merely increased by 0.1%. Since an increase in CPI is positive for the US Dollar, the market does not fall much and continues to hover around the same price.

AUD/USD | Before The Announcement - (Feb 13th, 2020)

AUD/USD | After The Announcement - (Feb 13th, 2020)

The above charts represent the currency pair of AUD/USD. Here since the US dollar is on the right side, we should see a red candle after the news release since the CPI data was good for the US dollar. By looking at the reaction of the market, we can say that the volatility did increase after the news announcement, which means AUD/USD proved to be better compared to USD/JPY.

A mere rise in the CPI number was good enough for the currency pair to turn into a downtrend from an uptrend. One can also see that the price goes below the moving average indicator. This means that the Australian Dollar is a very weak pair compared to the US dollar, the reason why the US dollar became so strong after the news release. Hence one can take a ”short” trade in the currency pair after the price breaks the MA line.

NZD/USD | Before The Announcement - (Feb 13th, 2020)

NZD/USD | After The Announcement - (Feb 13th, 2020)

The above charts represent the currency pair of NZD/USD. It shows similar characteristics as that of the AUD/USD pair before and after the news announcement. The CPI data caused the US dollar to strengthen against the New Zealand dollar, where the volatility change can be seen when the market turns into a downtrend.

The CPI data did have a positive impact on the currency pair, but the pair did not collapse. This means the data may not be very positive against the New Zealand dollar, where the price just remains on the MA line after news release and does point to a clear downtrend. Hence, all traders who went ”short” in this pair should look to take profits early in such market conditions as the market can reverse anytime.

That’s about Inflation Rates and its impact on some of the major Forex currency pairs. If you have any queries, please let us know in the comments below. Cheers.

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Forex Course

44. Analyzing The Forex Market – Fundamental Analysis

Introduction

Introduction

Introduction

We’ve now come to one of the most exciting topics in this course, which is analyzing the Forex market. Now that we know the history and the working of the Forex market, we’re all set to predict the future of the market. Several types of analyses are used by traders across the world to analyze the  Forex market. However, these analyses can broadly be classified into three types.

In this lesson, and the lessons coming forward, we shall be discussing all these three types of analyses.

Types of Forex market analysis

The three types of forex market analysis are:

  1. Fundamental analysis
  2. Technical analysis
  3. Sentimental analysis

Now, you must be wondering which one of them is best for analyzing the markets. Well, if you look at the most successful professional traders in the industry, they analyze the market by considering all the types. In this lesson, let’s understand the most essential Fundamental Analysis.

Fundamental Analysis

Fundamental analysis, as the name pretty much suggests, is the way of analyzing the market by studying the economic, social, and political forces in the country. These factors are considered because they affect the supply and demand of an asset.

The whole idea of trading using fundamental analysis is by considering the factors that affect the supply and demand of a currency. These factors are technically referred to as fundamental or economic indicators.

The concept behind this type of analysis is straightforward. If a country’s currency or economic outlook is good, then there is a high probability that the currency will show strength in the future and vice-versa.

What are the major economic indicators?

Below are some of the economic indicators which have the power to shift the economic situation of a country.

Interest rates

One of the most popular and important economic indicators are interest rates. There are several types of interest rates, but we will be focusing on the basic form of the interest rates set by the central banks. Central banks are the creators of money. This money is borrowed by private banks. And the percentage (interest) or the principle the private banks pay to central banks for borrowing the money is called a nominal or a base interest rate.

If the central banks wish to boost the economy, they decrease the interest rates. This then stimulates borrowing by both private banks and other individuals. And this, in turn, increases consumption, production, and the overall economy. Lowering the interest rates can be a good way to inflate the economy but can be a poor strategy too. Because in the long term, low-interest rates can over-inflate the economy with cash and create an unbalance in the money supply.

So, to avoid this, central banks increase interest rates. And this increase results in less money in the hands of private banks, businesses, and individuals to play around with.

Inflation

Inflation, as the name pretty much says, is fluctuation in the cost of goods over time. Inflation, too, is a vital indicator for economists and investors to forecast the future economy. Inflation will have a good effect on the economy if done uniformly. But, too much inflation can bring the balance of supply and demand on the tip in favor of the supply. And this eventually will bring down the value of the currency.

Apart from these two, there are many other macroeconomic indicators that traders consider to do their fundamental analysis. Some of them include GDP, PPI, CPI, Unemployment Rate, Government Debt, etc. Indicators like these help the investors & traders in analyzing the market and predicting its future.

This completes the lesson on fundamental analysis. In the next lesson, let us understand the insights about technical analysis. Don’t forget to take the quiz below before moving ahead!

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