Fundamental analysis is a set of methods for the future price level prediction based on the evaluation of political, economic, financial factors and credit policy. In the framework of fundamental analysis various news about monetary and financial events in the world, phenomena of political and economic life, both individual countries and the world community as a whole are taken into account. Case analysis is performed on how a particular event has an impact on the development of the financial market, what changes in rates it may lead to. The fundamental analysis is effective in long-term and medium-term price predictions.
The price prediction in this analysis also includes a study of individual organizations, enterprises and sectors of the economy to determine fair value. In the theory of fundamental analysis, there is a rule: if the current price of an object is higher or lower than the fair market value, the price of such object is overvalued or undervalued, and in the future, the market will move to the fair price.
The current level of the national economy is determined by the analysis of such macroeconomic indicators:
– Inflation expectations and inflation rate.
– GDP growth rate.
– Bank interest rates.
– Employment of population.
– Sell-through rates.
– Trust in this currency of the world financial market.
– Financial solvency of the population.
– Money stock growth dynamics on the domestic market.
– Speculative operations on the exchange market.
– The fiscal and monetary policy of the government.
– The development of other sectors of the global financial market.
The role of macroeconomic indicators in fundamental analysis
With the help of statistical data of macroeconomic indicators, traders and financial analysts study the current state of the economy and individual economic sectors of different countries and regions.
Our analysts take data for each indicator from reports published by public and private institutions during certain periods of the calendar year.
Our team of analysts creates a special economic calendar of important statements and events of the world economy, which is a valuable source of information and helps traders make the right decisions.
In the process of market analysis and prediction management, it is also important to understand that the market often changes after the publication of reports. Market volatility often takes place after the publication of reports on the economic and political situation. The degree of volatility depends on the indicator value. That is why it is important for traders to understand the value of a given indicator and how the specific indicator affects the economy.
Inflation has a strong impact on the exchange rate on a long-term horizon. Inflation displays how general goods and services rise in prices through the lens of economics.
Inflation depreciates the currency, so the currency of the country with a large level of inflation will decline on a long-term horizon against the currencies of the countries with a lower level of inflation. On a short-term horizon, the impact of the CPI inflation index may have the opposite effect: if inflation rises, the Central Bank raises the refinancing rate, which has a positive impact on the exchange rate of the national currency.
GDP growth rate
GDP is a general indicator of the strength of the economy, the stronger GDP grows, the stronger the national currency becomes. This is one of the main indicators for the currency markets. The reaction to the indicators of not only GDP but also their preliminary or refined values is very significant. GDP data is released every quarter and updated values of the indicator are published over the next two months.
Bank rate of interest
The rate of interest or refinancing rate is the interest rate at which central banks lend to commercial banks, which in turn lend to entrepreneurs and the population. Low rates of interest characterize the state of the economy during the crisis. The reduction in rates of interest leads to an increase in business activity. The strengthening of the economy usually leads to higher rates of interest and appreciation of the national currency, the higher the Central Bank’s refinancing rate, the higher the interest then charged by commercial banks for the loan they provide, which in turn reduces the level of business activity and leads to economic stagnation.
Indexes of employment
These indexes characterize the number of jobs and the employed population of the country, they are extremely important to accurately determine the level of unemployment.
The growth of employment allows us to speak with confidence about the growth of the country’s economy. And this, in turn, predicts positive changes in the value of the national currency. Indexes of employment affect quotations of national currencies, because the creation of new jobs leads to employment growth and growth of the market as a whole. GDP growth is taking place, at least on a short-term horizon.
The fiscal and monetary policy
The government addresses the issues of stabilization of the economic situation in the country. Regulation of taxes and expenditures, provision of credit supply, and other financial instruments affect the management of interrelated macroeconomic factors.
To conduct fundamental analysis, it is necessary to study all the above indicators, reports on world events in the economic, political, monetary and financial spheres of life.
– The next step is to analyze which events will lead to changes in exchange rates and to what extent they will affect market volatility. Fundamental analysis is considered to be one of the most difficult, because one event that occurred under different circumstances, has a different impact on the market.
– The correctness and accuracy of such an analysis depends on the degree of mutual influence of the various indicators. Only in case of its successful implementation, the trader receives information about the real situation of the economy and will be able to predict price movements on the market.