Key Forex Fundamental Factors

Trading in the forex market and keeping track of changes in all of the possible influences on a currency pair's exchange rate can be a daunting experience, regardless of a person's experience and trading acumen.

Nevertheless, keeping a watchful eye on all things economic and being a well informed trader can prepare you in dealing with these driving economic forces that move the currency markets.

This holds true even if your trading system is based on purely technical indicators since a number of key fundamental factors can and often do influence market moves, which may produce unexpected results when trading using systems based on technical analysis.

Also, regardless of the technical trader's assumption hat "Price discounts all," more often than not, new information which the market has yet to process can create havoc for traders and their trading systems and plans.

Important Forex Fundamental Factors

A number of key fundamental factors influence the forex market substantially and can affect both your trading system and overall success.

These might include such things as: interest rate differentials, central bank monetary policy, politics, inflation and measures against it, governmental fiscal spending policies, expected market performance for related financial markets and geopolitical events such as war or terrorism.

The economic factors for currency valuation are detailed further below:

1.      Interest Rates - short-term interest rates, such as the Fed Funds rate make up a key element in the valuation of one currency versus another. If rates are increased in one country, this will make that country's currency more attractive against other currencies which pay a lower rate of interest. In addition, currency traders holding the currency with the higher interest rate collect interest on the long currency, while paying out interest on the short currency, collecting the difference between the two.

2.      Inflation - if the country is in an inflationary economic cycle indicated by the Consumer and Producer Price Indexes, CPI and PPI, this would make it more likely that the central bank of that country would tighten interest rates in order to stem the increase in inflation. An increase in rates would tend to make the currency appreciate.

3.      Economic Expansion - indicators such as the Gross Domestic Product or GDP represent the total of goods and services produced in a nation's economy and give an indication of a country's overall economic health.

4.      Political Situation and Fiscal Policy - political stability translates into stability of the currency. The currency of a country with a questionable political situation or that has proved itself to be fiscally irresponsible will be less favored than the currency of a country with a stable political situation and a sober fiscal spending policy.

5.      Monetary Policy - because of the effect of monetary policy on interest rates, this makes up an important element in the valuation of a currency. Tighter monetary policy implying higher interest rates, while dovish or looser monetary policy indicating lower interest rates.

6.      Financial Markets - the expected performance of the financial markets denominated in a particular currency will affect the valuation of the currency based on the returns produced by investments in the stock and bond market in that country.

7.      Geopolitical Factors and Wars - the foreign exchange markets tends to favor currencies of peaceful nations with a stable political climate to the currencies of nations that are at war or are experiencing civil unrest

Fundamental Information Trading Considerations

Combining fundamental news analysis along with technical analysis offers the trader the best of both worlds and will minimize surprises while trading.

Some traders purposefully avoid trading on days with economic releases because the market may become temporarily volatile only to settle back towards the original trend.

Also, technical forex traders might avoid known risk events like major economic data releases since one of the key assumptions of technical analysis: "Price Discounts All" tends to break down during the period immediately after the announcement as the new information is assimilated into the price.

Overall, it really pays to keep an eye on economic news when trading in the f