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Understand the difference between fundamental analysis and technical analysis, the two basic methodologies for predicting price movements and market trends.
Fundamental analysis refers to the study of financial markets and economic studies in order to forecast market trends, and includes materials such as economic figures, news, rates trends and governmental policies. Contrary to technical analysis, which focuses solely on charts, fundamental analysis is concerned with underlying market factors.
The study of macroeconomics generally includes domestic and international economic indicators, such as Gross Domestic Product (GDP), inflation rate, interest rates etc., which may involve an abundance of data and figures. Furthermore, news is updated so frequently and it takes time to investigate and gather up information, results may already be outdated by the time it is ready for release. Bearing this in mind, you should combine the use of both fundamental analysis and technical analysis to grasp market trends and movements.
Interest rates are one of the major factors that affect a country's currency, primarily because it can provide income for investors who would usually opt to hold a currency that brings in the highest possible interest. For example, if the 1 year fixed deposit rate of Australian Dollars (AUD) is 3.5% and 0.25% for the US Dollar (USD), investors would tend to hold AUD and sell USD.
Furthermore, the anticipation of interest rates also plays a major role in currency fluctuations. An appreciation of AUD could be expected when the interest rate spread between AUD and USD widens, and vice versa.
The following are the key factors influencing a country's economy, and thus the strength or weakness of its currency, stock indices and commodity prices. As the US is focal to financial trading worldwide, bear in mind that indicators and statistics from the US have a significant impact around the world. Refer to our Economic Calendar to keep track of when these figures are released.
Non-farm payroll employment measures the total number of paid US workers, excluding not just employees of farms, but also government or NPO employees and household employees (nannies, housekeepers etc.). It is announced on the first Friday of the month.
Typically, non-farm payroll employment indicates the conditions of the economy. When it drops, it represents decreased production and a resulting downturn in the economy. If non-farm payroll employment increases, a healthy economy is expected and in theory this will benefit the currency. Therefore, non-farm payroll employment is an important indicator that influences the economy and the development of the financial market.
"Housing Starts and Building Permits" indicate the number of houses or buildings being constructed. In the US, "Housing Starts" separates into two kinds: single and groups of houses - when a single house is constructed, it is indexed to 1, and for a group of houses that contains 100 units, it is indexed to 100.
Housing starts and building permits have become relatively important nowadays in North America and Europe in particular, as they reflect the condition of an economy - housing construction is recognised as an investment, and plays a major role in stimulating the economy due to perceived increased employment rates when "Housing Starts" increases.
Additionally, the construction of new houses has a chain effect on other industries, such as manufacturing, raw materials, financial institutions offering mortgages, etc., and boosts the economy as a whole. In theory, a country’s currency benefits when housing starts and building permits increase, and suffers the he event of a decrease.
This is an economic indicator that measures sales of newly built homes. A new home sale is defined as any deposit or contract signing in the year the house was built or the following year. This indicator is released by the U.S. Department of Commerce's Census Bureau at the end of each month.
In general, the purchase of a new house often involves a mortgage, hence new home sales are directly affected by mortgage rates. New home sales play a major role in the retail sector, and reflects the condition of the real estate market - when consumption is strong in real estate properties, it indicates that the economy is doing well and theoretically strengthens a country’s currency. Furthermore, new home sales are positively correlated to housing starts and building permits - if housing starts and building permits increase, new home sales are also expected to increase, and likewise in the event of a decrease.
Producer Price Index, known as PPI, measures the average change in selling prices received by domestic producers of goods and services over time. It is viewed as an indication of inflation, and PPIs measure price changes from the perspective of the seller. The PPI looks at three areas of production: industry-based, commodity-based, and stage-of-processing-based companies. In the US, PPI is measured by the US Bureau of Labor Statistics, and most of the data is collected through surveys from producers in manufacturing, mining, and service industries with around 2300 types of commodities. After this it is compared against the basic index year, which is 1967.
In general, when there is a sustained and accelerated increase in the producer price index, a country's central bank's reaction is to take fiscal policy countermeasures such as rate increases, to prevent rapid increases in the inflation rate and appreciation of the national currency.
The retail sales report captures in-store sales as well as catalogue and other out-of-store sales. The retail sales report is a major economic indicator, and reflects the change of consumption levels. In developed countries in particular, retail sales are generally a large component of total gross domestic product (GDP). Higher retail sales may represent a better economy and result in a higher interest rate, eventually benefiting the value of the currency.
This monthly economic indicator is compiled by the Census Bureau and the Department of Commerce. The report for each month is released about two weeks into the following month, and shows sales figures for such specific groups as food and beverages, automobiles, and clothing.
The Index of Consumer Sentiment measures the optimistism level of consumers regarding the immediate future of the economy.
The report is conducted through random sampling that includes the comments of consumers on current and expected economic conditions, employment rates and personal financial positions. In comparison to the University of Michigan Consumer Confidence Index (mentioned below), fluctuations in the Index of Consumer Sentiment are relatively larger, which lowers the reliability of this as an economic indicator.
Overall, the fundamental rationale is that if a country's consumers are optimistic and rational, they will tend to purchase more goods and services, and this increase in spending will inevitably stimulate the whole economy and may lead to a higher interest rates, and benefit the national currency.
Durable Goods Orders are a monthly economic indicator released by the Bureau of Census in the US, that reflects new orders placed with domestic manufacturers for the delivery of high-priced capital goods which have a useful life of over three years (durable goods) in the near future, and the level of manufacturing activity.
Overall, orders for durable goods can provide information on how busy factories will be in the future. Orders placed in the current month may provide work in factories for many months to come, as they work to fill the orders. Rising durable goods orders are normally associated with stronger economic activity, and can therefore lead to higher short-term interest rates which is usually beneficial to a currency's strength.
An index based on a survey of manufacturing firms by the Institute of Supply Management in the US, tracking employment level, production inventories, new orders and supplier deliveries nationwide. Based on these surveys, a composite diffusion index is created to illustrate the conditions in national manufacturing in the US.
Investors can use the ISM Manufacturing Index to get an understanding of national economic conditions - when this index rises it can be assumed that the stock market will also increase.
This is a measure of the number of claims to receive state unemployment benefits. This figure can correlate with the direction of the economy - more claims indicate a weakening economy.
An indicator of the state of the manufacturing sector in the US, the PMI index is based on new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 shows an expansion of the sector, under 50 shows a contraction, while a reading of 50 means there has been no change from the previous month.
This is the percentage of the total labour force that is unemployed, but actively seeking employment and able to work. The unemployment rate of an economy is a lagging indicator, confirming but not foreshadowing long-term market trends.
The University of Michigan Consumer Sentiment Index is a regular survey conducted by the researchers of the University of Michigan on consumers in the US, assessing personal financial status and national economic status.
Researchers of University of Michigan use survey data from 500-600 adults, and calculate the seasonally adjusted consumer confidence index, current index and expected index. Researchers set the result of the first quarter of 1966 to 100 for the sake of index calculation.
For a long time, the data has been a valuable guideline of the changes in consumer attitude, which can be used to predict consumer behaviour. In addition, compared with other data which serves similar purposes, this data has lower volatility and higher stability - there is close correlation between this index and consumer spending.
If this index rises, the bond market will be treated as bearish and bond price will fall, and the stock market will be treated as bullish. Additionally, if consumer confidence rises, consumption should grow and the economy will be stronger - in this case, interest rates will be raised and the US dollar exchange rate will also strengthen as a result.
As with foreign currency trading, many factors contribute to rises and falls in supply and demand of commodities. For 'soft' commodities such as corn and soybeans these can range from the weather, crop diseases and production strikes etc., on the supply side, and price and shifting cultural attitudes on the demand side. Supply of energies (such as crude oil) and precious metals may be limited by geopolitical crises, while demand can be driven by increases in purchasing power in emerging economies.
Keep up-to-date on such critical events with our real-time news feeds available in our range of Trading Platforms.
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