By Nathan Boardman
When conducting fundamental analysis, it is essential to carefully consider the different factors that can impact the financial markets. These factors include economic conditions, political events, and social trends.
Having a clear grasp of the varying strengths of different financial assets is crucial in the financial markets, especially in the foreign exchange market, as it empowers investors to make well-informed decisions. The fundamentals have a significant influence on the supply and demand of financial assets, providing insights into the economic health of a nation.
For many investors, especially those who are new to investing, the sheer amount of data and information can seem overwhelming. So, right now, we’re going to look at a number of fundamental concepts, and you’ll understand what to look for when doing this kind of market analysis.
Macroeconomics
These are concerned with the state of the economy as a whole, as well as its performance and behavioral patterns.
Personal consumption expenditures (PCE)
As an additional indication of the rise in consumer prices that has occurred as a result of inflation, this data point functions. On the other hand, it differs from the Consumer Price Index (CPI) in that it takes into account the fluctuation in the cost of goods and services per unit that are marketed to and utilized by consumers.
Because of this, it provides insightful perspectives on the spending habits of consumers. Central banks are keeping a close eye on this particular data point, which represents an additional data point.
Exploring the realm of monetary policies and their impact on interest rates
Monetary policies and interest rates play crucial roles in shaping a country’s money supply and overall economic well-being. These factors also shape consumer behavior and spending patterns within an economy.
The consumer price index (CPI) and producer price index (PPI)
From the point of view of both consumers and producers, these are indicators of the increase in prices that an economy is experiencing. Customers constitute the most important and fundamental component of any economy. The majority of economic activity can be attributed to consumer spending. Therefore, central banks keep a close eye on the data points for both the CPI and the PPI.
Events of a geopolitical nature
Geopolitical occurrences mirror a nation’s position on an international level and exert influence on its economy. Here are some examples:
- Conflicts Global health crises
- Political stability
- Occurrences of catastrophic events in nature
Reports on economic data
These reports are published weekly, monthly, quarterly, and annually. Central banks use these tools to shape their monetary policies, and investors use them to predict potential investment prospects in the financial markets. These tools ultimately influence central bank meetings.
Price stability and employment are two key areas of focus for a central bank. The economic reports provided below assist investors in gaining insights into these areas of interest and gauging the possible stance of a central bank.
Employment data and jobless claims
The level of employment has a substantial impact on consumer spending patterns. When individuals have stable jobs and a reliable income, they tend to be more inclined to spend generously. Conversely, during periods of unemployment, consumers tend to adopt a more cautious approach to their expenditures.
The NFP report provides insights into the employment situation, explicitly focusing on non-farm workers. It is published on the first Friday of each month, exerting a more significant influence on the financial markets and specific financial assets. Unemployment claims are typically published weekly, specifically on Thursdays.
These reports provide insights into the fluctuations in the number of individuals who submit applications for unemployment benefits. These data points are utilized in conjunction to gain insights into the robustness of the labor market, which is a primary area of interest for a central bank.
These suggestions serve as a foundation for individuals seeking to enhance their fundamental analysis. However, it is crucial to consider that these underlying factors must be assessed and comprehended in relation to the current stage of the economic cycle.
For instance, although a rise in inflation might appear problematic during the contractionary phase of the economy, it could be necessary during the expansionary phase. Therefore, it is essential to have a comprehensive approach when dealing with the financial markets.
