The primary objective of a forex trader is to speculate the direction of a specific currency, then trade the currency pair that will leverage their investment. For the UK Fundamentals traders, however, to gain a more competitive edge in forex trading, they must establish the factors that trigger currency movements in the market.
This is why most professional traders prefer employing the fundamental analysis of the market over any other analytical method.
The application of trading fundamentals aims at determining the economic factors that impact the valuation of a given currency. This article goes into the specifics of looking at the five major market fundamentals that drive the UK currency.
What is Fundamental Analysis?
Fundamental analysis is a method through which traders determine the intrinsic value of the currency market by studying the economic statistics and news events of various economies.
A fundamental analyst may have to look at multiple macroeconomic and microeconomic factors, including a country’s cost of production, labour reports, Central Bank reports, and international politics. Fundamental analysis is undertaken in two dimensions as follows:
Qualitative Fundamental Analysis
The qualitative fundamental analysis of stocks is used to scrutinise factors that affect the health and quality of a company.
When it comes to the forex market, the qualitative analysis looks at the market sentiment, intuition, and experience of forex participants. The aim of qualitative analysis is to determine the factors surrounding the demand and supply of a currency.
This dimension of fundamental analysis applies numbers and statistical calculations to determine the value of a specified currency. The aim is to come up with a mathematical model that reflects the behaviours of participants in an economy.
What Are Economics in Forex Fundamentals?
When trading the forex market, the economics of various countries is such a vital factor to consider. This is because forex trading compares the currencies of two countries, where the exchange rate is determined by the value of each currency, and by extension, the economics of those countries.
But what exactly is economics? Simply put, economics refers to the production, distribution, and consumption of a country’s resources (goods and services). The growth in a country’s economics results in an increase in the value of its currency, which validates the need to study economic fundamentals for trading.
- Five Major UK Fundamentals
The UK currency (GBP) is largely influenced by the country economic status, particularly the UK fundamentals. This section highlights the five major fundamentals in the UK that impact the Pound (GBP).
When it comes to the UK fundamentals, interest rates are always at the top of the list. Interest rates are set by the central bank after assessing the various economic indicators in the UK. When the Bank of England raises the interest rates or tightens the monetary policy, the economy is said to be growing at a steady pace.
When the economy is growing weak, the Bank of England will lower the interest rates to stimulate the country’s economic growth. If traders speculate a hike in interest rates, most of them will typically open a trade position even before the UK’s central bank announces their decision on the monetary policy.
Inflation- Consumer Price Index (CPI)
CPI is the UK’s official measure of inflation. When CPI (inflation) is high, the Pound (GBP) declines in value. This is because goods in the UK tend to become less competitive, reducing the demand for UK exports. As a result, the Pound becomes less attractive. Inflation is considered to be stable when ranging somewhere between 1% and 3%.
Purchasing Managers’ Index (PMI)
You cannot talk about UK fundamentals without mentioning the Purchasing Manager’s Index. PMI measures the direction of an economy relative to the service sector. When the index is above 50, this reflects the expansion of the economy’s service sector.
On the other hand, a measure below 50 may be a sign of a weakening economy. Traders watch the release of the PMI report to speculate the performance of the country’s service sector, which has a significant influence on the value of the Pound.
Gross Domestic Product (GDP)
GDP is one of the most important UK fundamentals in the UK used by forex traders to speculate the value of a currency pair. This is because GDP tends to affect the overall state of an economy directly. Traders follow the preliminary GDP release to initiate a trade, as the release may trigger volatility of the forex market.
Claimant Count Change
This is also one of the crucial UK fundamentals used by forex traders to determine the value of the Pound. Claimant count indicates the number of people claiming unemployment benefits in the UK.
The claimant count change, therefore, reflects the difference in the rate of unemployed people in a given month. A growing claimant count change shows a weakening labour market, which has an adverse effect on the value of the Pound.
When trading in the forex market, speculating the direction of a currency is crucial. This is where fundamental trading comes in handy. Monitoring and analysing the fundamentals of the UK economy enables traders to establish the value of the Pound for a specified timeframe.
Some of these UK fundamentals include the GDP, inflation, interest rates, PMI, and claimant count change.
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