Fundamental analysis is a set of methods the future price level prediction based on the evaluation of political, economic, financial 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 and how a particular event has an impact on the development of the financial market, what a change in rates it may lead. The fundamental prediction 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 rate of interest.
- 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 degree of development of other sectors of the global financial market.
The importance of macroeconomic indicators
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 more recent times 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. The degree of possible price change depends on the value of the indicator. Therefore, we always recommend taking into account not only the data on a specific indicator but also its value, as well as the degree of influence on the economy and market volatility.
Inflation has a strong impact on the exchange rate on a long-term horizon. What is inflation? In the simplest terms, inflation is a general goods and services rise in prices through the lens of economics.
Inflation depreciates the currency, so the currency of the country with the 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 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 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 are released on a quarterly basis 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 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 an employment growth and growth of the market in totality. GDP growth is taking place, at least on a short-term horizon.
Sell-through rates characterize the change in sales in the retail sector, as well as the level of consumer spending and demand. With the growth of the sell-through rates, the national currency rate also grows.
This group of indicators is important for analysts and traders because it shows a real picture of the development of the economy, as well as seasonal patterns of consumer behavior.
To conduct a 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.
Next, it is necessary to analyze what events will lead to changes in exchange rates and to what extent they will affect the volatility of the market. 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.
Correctness and accuracy of the results of such analysis consist of the degree of mutual influence of various indicators. Only in this case, the trader receives information about the real situation of the economy and will be able to make price movements on the market prediction.
Technical analysis of financial markets involves future price dynamics prediction based on the past movement, so technical analysis is carried out mainly on the basis of charts. The main thing in the assessment of financial markets is the search for trends and convenient points of entry into the market (buying or selling a financial instrument). This analysis shows excellent results in highly volatile markets, so it is most often used in the analysis of commodity and financial markets.
There are 3 basic axioms:
- Market movements take everything into account. Any factor affecting the price (for example, the market price of the good) — economic, political, psychological is taken into account in advance and reflected in its schedule. Therefore, the study of the price chart is a mandatory condition for prediction.
- Prices move in a focused manner.
This assumption became the basis for the creation of all methods of technical analysis. The trend term means a certain direction of price movement. The main task of technical analysis is to determine trends (i.e. their characteristics from the moment of occurrence to the very end) for use in trading.
- History repeats itself.
In fact, technical analysis deals with the history of certain events related to the currency market, where the main ‘engine’ of prices is social and emotional mood.
Integration for better results
When assessing financial markets, each trader chooses for himself which type of analysis is preferable and which method is more effective — fundamental or technical analysis. Using the techniques of both types of analysis together, you can achieve more accurate results for market movements prediction.