Fundamental analysis involves monitoring broad macro-economic factors that can affect the markets. Information about these events is usually readily-available, so you will not have to search high and low to find all the details you need.
Each factor will usually have a predictable effect on the market, meaning you can gain a good understanding of which way it will turn. As with all monitoring techniques, however, it is best to combine fundamental analysis with other methods to obtain a clearer picture.
The main events that traders will monitor are:
- Central bank interest rates
- Balance of trade
- Fiscal policy/budget
- Inflation rates and consumer expenditure
- Labour market statistics
Each of these factors will have a particular effect on the markets. The table below outlines what will usually happen when one of the above events occurs.
|Event||Effect on the market|
|Interest rates increase||Markets will tend to appreciate|
|Interest rates decrease||Markets will tend to depreciate|
|Increase in surplus/decrease in deficit||Markets will tend to appreciate|
|Decrease in surplus/increase in deficit||Markets will tend to depreciate|
|Government spending increases||Markets will tend to appreciate|
|Government spending decreases||Markets will tend to depreciate|
|Inflation decreases||Markets will tend to appreciate|
|Inflation increases||Markets will tend to depreciate|
Limitations of fundamental analysis
When using fundamental analysis, it is essential to remember that these events will only have the expected effect if everything else stays the same. If something else changes as well, then the market could react in a completely different way altogether.
For example, if a country’s central bank decides to cut interest rates in response to increased government spending, the effect on the market will be neutral. This is why it is important to use other forms of analysis when formulating your trading strategy.
To help you keep up to date with the latest market announcements, TradeFred provides all clients with a comprehensive economic calendar. This will display all upcoming events that are taking place on a particular day.
As a result, you will be able to watch out for important information and use this to complement your trading strategy.