Many traders utilise Fundamental Analysis on the strengths and weaknesses of a particular instrument to assess whether the instrument will appreciate or depreciate.
At City Index, we understand the importance of fundamental analysis and through our range of platforms, offer access to multiple tools and resources to help you to fundamentally analyse the markets you wish to trade.
What is Fundamental Analysis?
Unlike Technical Analysis, which looks purely at price action and trends, Fundamental Analysis takes on a much more rigorous assessment of an asset, such as a currency or stock index. Fundamental analysts look at key elements that are likely to have a bearing on the strength or weakness of a particular currency, stock or share such as economic data, political factors and even the impact of natural disasters.
For example, in property investments, some may buy a house on expectations that as the house is placed within a growth area, its price should rise in value. A fundamental analyst however, would look at its foundations, insulation, history, the surrounding schools and any scope for improvements before deciding to invest.
Similarly, fundamental analysts utilise all pieces of available data to help them to gauge the strength of a particular instrument. For example, Fundamental Analysts pay particular attention to the release of key economic data and reports such as unemployment and GDP data, interest rate announcements, production data etc to help them to determine the future direction of a country’s currency against another, or a stock index such as the FTSE, Wall Street, Germany 30 or France 40. For instance, positive production and jobs figures indicate a strengthening economy and would therefore imply that the country’s currency is likely to appreciate, while negative economic data would indicate growing pressure on stocks and currencies, thus pulling down prices.
At City Index, we offer competitive prices on our CFD markets, including 1 point on the FTSE 100, Wall Street, Germany 30 and France 40 as well as on EUR/USD during market hours. We also offer reduced commission rates on all USD share CFDs. Our FX Trading platform offers flexible leverage scales from 20:1 to 50:1 on 28 major and minor currency pairs.
Key Factors of Fundamental Analysis
Economic Growth and Output
Key indicator: Gross Domestic Product (GDP) calculates the sum of goods and services produced within the country. It is one of the most important indicators of economic growth and output, thus telling us about the economic strength and performance of the country.
Inflation
Key indicator 1: Consumer Price Index (CPI) measures the change of the average price of goods and services paid by consumers. It is a major indicator adopted by the government for its inflation target. It has a significant impact on setting interest rates.
Key indicator 2: Producer Price Index (PPI) measures the changes in the price of goods and services at the producers’ level.
Interest Rates
Key Indicator: Interest rates have a direct impact on currency rates. The demand on the currency with a higher yielding interest rate is often greater than the one with a comparatively lower interest rate.
International Trade
Key Indicator: As the demand for goods and services from a particular country increases, demand for the country’s currency also goes up. Thus, the value of the currency will appreciate. Similarly, growing demand indicates a better performing economy, which has a positive impact on the country’s stock indices etc.
Political Situation
Key Indicator: Political crisis and uncertainty in a country often have a negative impact. When a country is politically unstable, investors’ confidence in its economy also decreases, thus putting pressure on currency prices, stock indexes etc.
Fiscal policies
Key Indicator: Fiscal policies such as budget planning, government spending and taxation encourage or discourage productivity and spending in the economy, thus having a major impact on the markets.
Monetary Policy
Key Indicator: The monetary policy adopted by Central Banks has a big influence in the near term demand for stocks, shares and currencies. If for example, the Bank of England adopts a hawkish monetary policy, this indicates that interest rates are set to rise and may increase the demand for the pound sterling, which could therefore appreciate as a result.
Find out more about Technical Analysis.