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Fundamental analysis is the study of the economic, political, and social drivers of the financial markets. It is a crucial aspect of the financial markets as it allows investors to understand the strength of one financial asset against another, especially in the foreign exchange market. Consequently, the fundamentals affect the supply and demand of the financial assets, while depicting the state of a nation’s economic health. 

It may seem daunting to many investors, especially the ones who are new in their investing journey, because of the large amount of data and information. Hence, I outline a few starting points I teach in my mentorship program to make this an easier process for my students.

Macroeconomics

These focus on the overall health, performance, and behavior of the economy. 

Monetary policies and interest rates

Monetary policies and interest rates are key tools used by central banks to influence a nation’s money supply and economic health. These are part of the key factors that influence consumer behavior and spending in an economy. 

Geopolitical events

Geopolitical events reflect a country’s standing on a global scale and have an impact on its economy. These include:

  • Wars
  • Pandemics
  • Government stability
  • Natural disasters

Economic data reports

These reports are released weekly, monthly, quarterly, and yearly. They are used by central banks to formulate the monetary policies and by investors to anticipate the potential investment opportunities in the financial markets leading to the central bank meetings. 

Two of the main focuses of a central bank are: price stability and employment. The economic reports below help investors understand both of these focuses and the potential sentiment of a central bank.

Consumer price index and producer price index (CPI and PPI)

These reflect the inflation in an economy from a consumer and producer perspective. Consumers are the core and essential component of an economy. Consumer expenditure accounts for the majority of economic activity. Hence, central banks follow CPI and PPI data points very closely.

Personal consumption expenditures (PCE)

This is another data point that reflects inflation in consumer prices. However, it differs from CPI because it reflects the change in price for goods and services, per item, targeted towards and consumed by consumers. Hence, it provides valuable insights into consumer expenditure. This is another data point closely watched by central banks.

Non-farm payroll (NFP) and unemployment claims

Employment has a direct correlation with consumer expenditure as consumers tend to be more generous when they are employed with a steady stream of income and more conservative when they are unemployed. NFP reflects the change in the number of employed individuals, excluding the farming sector, and is released on the first Friday of every month. Hence, it has a stronger impact on the financial markets and on certain financial assets. Unemployment claims are released every Thursday and reflect the change in the number of people who file for unemployment. These data points are used together to understand the strength of the labor market; one of the key focuses of a central bank. 

While these are starting points for someone looking to strengthen their fundamental analysis, it is also important to note that these fundamentals need to be reviewed and understood in accordance to which phase of the economic cycle we are in. For example, while an increase in inflation may seem like an issue in the contractionary phase of the economy, it may be needed in the expansionary phase of the economy. As such, one must approach the financial markets holistically. 

This analysis and any provided information can be used only for educational purposes. SharmaFX is not a professional financial institution nor provides any financial services. SharmaFX does not provide any financial advice, investment advice, or trading signals. SharmaFX is not responsible for any losses arising from any investment based on any recommendation, forecast or other information herein contained.

Editors’ Picks

EUR/USD holds above 1.0650 after US data

EUR/USD holds above 1.0650 after US data

EUR/USD retreats from session highs but manages to hold above 1.0650 in the early American session. Upbeat macroeconomic data releases from the US helps the US Dollar find a foothold and limits the pair's upside.

EUR/USD News

GBP/USD retreats toward 1.2450 on modest USD rebound

GBP/USD retreats toward 1.2450 on modest USD rebound

GBP/USD edges lower in the second half of the day and trades at around 1.2450. Better-than-expected Jobless Claims and Philadelphia Fed Manufacturing Index data from the US provides a support to the USD and forces the pair to stay on the back foot.

GBP/USD News

USD/JPY rebounds from 154.00 as investors digest fears of Japan’s intervention

USD/JPY rebounds from 154.00 as investors digest fears of Japan’s intervention

USD/JPY finds buying interest near 154.00 as investors see Japan’s intervention mere a temporary solution to support weak Japanese Yen. Japan’s National CPI data will impact market expectations for BoJ’s rate hikes. The US Dollar corrects despite the Fed is expected to keep interest rates higher for a longer period.

USD/JPY News

Editors’ Picks

EUR/USD holds above 1.0650 after US data

EUR/USD holds above 1.0650 after US data

EUR/USD retreats from session highs but manages to hold above 1.0650 in the early American session. Upbeat macroeconomic data releases from the US helps the US Dollar find a foothold and limits the pair's upside.

EUR/USD News

GBP/USD retreats toward 1.2450 on modest USD rebound

GBP/USD retreats toward 1.2450 on modest USD rebound

GBP/USD edges lower in the second half of the day and trades at around 1.2450. Better-than-expected Jobless Claims and Philadelphia Fed Manufacturing Index data from the US provides a support to the USD and forces the pair to stay on the back foot.

GBP/USD News

Gold clings to strong daily gains above $2,380

Gold clings to strong daily gains above $2,380

Gold trades in positive territory above $2,380 on Thursday. Although the benchmark 10-year US Treasury bond yield holds steady following upbeat US data, XAU/USD continues to stretch higher on growing fears over a deepening conflict in the Middle East.

Gold News

Ripple faces significant correction as former SEC litigator says lawsuit could make it to Supreme Court

Ripple faces significant correction as former SEC litigator says lawsuit could make it to Supreme Court

Ripple (XRP) price hovers below the key $0.50 level on Thursday after failing at another attempt to break and close above the resistance for the fourth day in a row. 

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Have we seen the extent of the Fed rate repricing?

Have we seen the extent of the Fed rate repricing?

Markets have been mostly consolidating recent moves into Thursday. We’ve seen some profit taking on Dollar longs and renewed demand for US equities into the dip. Whether or not this holds up is a completely different story.

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