Fundamental analysis holds a crucial position in foreign exchange investment decisions. In the current era of global economic integration, national economies are closely interconnected. The release of economic data or policy adjustments in any country can trigger fluctuations in the foreign exchange market. By conducting an in-depth analysis of these fundamental factors, investors can identify the core drivers of currency values. This enables them to be more forward-looking and accurate in making investment decisions, thus avoiding blind following and emotional trading.

Economic indicators are vital data that can reflect valuable information about a country's economic performance and prospects.

Major Economic Indicators

Gross Domestic Product (GDP)

As a core indicator for measuring the final results of production activities in a country or region within a certain period, Gross Domestic Product (GDP) comprehensively reflects the overall scale and growth rate of the economy. When a country's GDP grows robustly, it implies that the country's economy is booming. Enterprises' profits increase, more job opportunities are created, and consumers' confidence also strengthens accordingly. Such a positive economic environment will attract more domestic and foreign investments. These favorable factors will increase the demand for the country's currency and drive the currency to appreciate. Conversely, if the GDP growth is weak or even shows negative growth, it indicates that the economy is in trouble. Investors will lose confidence in the country's economic prospects, and the currency will often face depreciation pressure.

Inflation Rate

The inflation rate is a key indicator for measuring changes in the price level, and it has a close inverse relationship with the value of currency. It is mainly measured by indices such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI reflects the price changes of a basket of goods and services purchased by consumers, while the PPI focuses on measuring the price fluctuations of raw materials, intermediate products, and final products that producers face during the production process. When the inflation rate rises, it means that prices generally increase. The same amount of currency can buy fewer goods and services, and the actual purchasing power of the currency decreases, which is known as currency depreciation.

Unemployment Rate(UR)

The unemployment rate is a crucial indicator reflecting the health of the economy and the supply - demand relationship in the labor market. It has a close connection with both the economy and the currency market. When the unemployment rate drops, it indicates that the economy is developing well. Enterprises have a strong demand for labor, and the job market is vibrant. This not only increases residents' incomes and stimulates consumption but also boosts investors' confidence in the country's economy, attracting more investment and thus supporting the country's currency.

Interest Rate(IR)

Interest rates have a profound impact on currency supply and demand, as well as exchange rates. When a country raises its interest rates, it means the returns from holding its currency increase. This attracts foreign investors to pour funds into the country for higher yields. For instance, if the Bank of England hikes interest rates, international investors will be more inclined to deposit money in British banks or buy British bonds. As a result, the demand for the pound rises, driving the pound to appreciate. Conversely, when interest rates decline, the returns for investors holding the currency decrease. They may transfer their funds to countries with higher interest rates, leading to a drop in the demand for the currency and subsequent depreciation.

Trade Balance(TB)

The trade balance, which is the difference between a country's exports and imports, significantly influences the value of its currency. When a country has a trade surplus, it means that its exports exceed imports, and the country earns more foreign exchange in the international market. This increases the demand for the domestic currency because foreign buyers need to exchange their currencies for the domestic currency to pay for imported goods, thus driving the appreciation of the domestic currency. For example, the United States has long had a trade deficit, which is one of the factors contributing to the depreciation pressure on the US dollar.

Classification of Economic Indicators

Economic indicators are mainly classified into three categories: leading indicators, lagging indicators, and coincident indicators.

Leading Indicators

Leading indicators are those that fluctuate before economic changes occur. They can predict future economic conditions and provide investors with important forward-looking information.

Consumer Confidence Index (CCI): This index measures consumers' optimism and sentiment toward the economy. An increase in the index indicates a rise in consumer confidence, which usually leads to an increase in consumer spending, thereby stimulating economic growth.

Purchasing Managers' Index (PMI): The PMI, through surveys of purchasing managers in the manufacturing or service sectors, reflects the situation of enterprises in terms of production, orders, inventory, etc. When the PMI is above the 50-point threshold (the line separating expansion from contraction), it signals economic expansion, with active production activities in enterprises, having a positive impact on the currency market. Conversely, if it is below 50, it implies economic contraction, which may cause the currency to weaken.

Although leading indicators have predictive capabilities, they are not absolutely reliable and may sometimes generate misleading signals. Therefore, traders should use them in combination with other technical and fundamental analysis tools.

Lagging Indicators

Lagging indicators are those that show corresponding changes only after economic activities have already changed. They are typically used to confirm the reversal or continuation of an economic trend.

For instance, take the unemployment rate(UR). After an economic recession ends, enterprises may first observe the recovery of market demand and then gradually increase hiring. As a result, the decline in the unemployment rate often lags behind the economic recovery.

Coincident Indicators

Coincident indicators refer to those that change in tandem with overall economic activities. They reflect the current economic situation.

Industrial Production Index(IPI): It reflects the production activity levels of major industrial sectors. Its fluctuations are basically in line with those of the economic cycle, providing a real-time snapshot of industrial activities within the economy.

Retail Sales Data(RSD) demonstrate consumers' spending patterns and situations, reflecting the strength of consumer demand in the economy.

When the Industrial Production Index rises and the retail sales data are good, it indicates that the economy is in a prosperous stage. If the Industrial Production Index drops and the retail sales data are poor at the same time, it means the economy is weak, and the currency may face depreciation pressure.

Political Events

Significant political activities can have a substantial impact on the foreign exchange currency market. Events such as elections or major policy changes can affect investors' confidence in a country's economic prospects and political stability. For example, during the U.S. presidential election, investors' expectations of the vote results can influence fluctuations in the exchange rate of the U.S. dollar. Also, in the case of the Brexit event, positive news related to the progress of Brexit has likewise caused fluctuations in the value of the British pound.

Release of Economic Policies

Central banks or governments around the world adjust their monetary and fiscal policies. Central banks adopt expansionary or contractionary monetary policies based on the current economic situation, while governments adjust fiscal policies to achieve sustainable economic growth. When the economy overheats and faces inflationary pressure, central banks may implement contractionary monetary policies, raising interest rates and reducing the money supply, which can lead to the appreciation of the domestic currency.

To stimulate the economy, the government may adopt expansionary fiscal policies, such as cutting taxes and increasing government spending. However, this may also cause inflation and an increase in fiscal deficits, with a complex impact on the currency. On one hand, economic growth may attract foreign investment, providing some support for the currency. On the other hand, inflation and fiscal deficits may undermine the currency's attractiveness.

Geopolitical Conflicts

Sound economic growth hinges on a stable economic and political environment. Geopolitical conflicts, such as wars and strained international relations, can have a significant impact on the currency market. Take the Russia- Ukraine conflict as an example. This conflict has triggered concerns among investors about the stability of the European region. Consequently, funds have been flowing out of Europe and moving towards relatively safe assets like the U.S. dollar and gold. This has led to a substantial decline in the demand for the euro, causing the exchange rate of the euro against the U.S. dollar to keep falling in the foreign exchange market.

Release of Major Economic Data

The release of major economic data has a significant impact on the foreign exchange investment market. Such data can reflect the health of a country's economy, thus influencing the market demand for its currency and the exchange rate trends. For instance, key data like the GDP growth rate, employment figures, and the Purchasing Managers' Index (PMI) enable investors to understand the economic situation and development prospects of a country through these released data. As a result, it helps to stabilize investors' confidence and investment directions.

The Importance of the Economic Calendar

Since news events have a non-negligible impact on foreign exchange market investment, traders should always pay attention to various major political and economic developments and changes in market expectations. The economic calendar details key information, such as important economic data to be released by various countries, central bank meetings, and political events. By following the economic calendar, investors can know in advance the time nodes of major events so that they have enough time to adjust their investment strategies.