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Fundamental Analysis for Beginner Forex Traders – Diversit-e Smart Trade College
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It is mandatory to procure user consent prior to running these cookies on your website. Sign in. Log into your account. Forgot your password? Privacy Policy. Password recovery. Therefore, this can also have a negative effect on the value of a currency. If the inflation rate is reported to be within the target range, the currency value does not tend to react very much. The currency value reacts much more if the inflation rate is drastically outside this range.
To protect consumers from excessive inflation, central banks will tend to raise interest rates.
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This is because, as explained above, it reduces the spending power that consumers have, and so the prices for goods and services decrease under the reduced demand. Under decreased demand for something, the price falls or stops increasing. When inflationary data is higher than expected, traders may buy the currency of a country in anticipation of an interest rate hike from the central bank, which means that the currency could appreciate in value.
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However, this depends, because excessive inflation could erode the value of any capital within that economy and the currency value could decrease. This makes the inflation rate a more difficult economic indicator to use when determining the likely increase or decrease of a currency value. If a central bank is concerned about inflation, it is considered hawkish and is more likely to adopt a higher interest rate. If a central bank is concerned about growth, it is considered dovish and is more likely to adopt a lower interest rate.
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The educational content on Tradimo is presented for educational purposes only and does not constitute financial advice. All rights reserved. Understanding of fundamental analysis. Understanding of economic indicators. Economic indicators and their impact on currencies Economic indicators measure how strong an economy of a country is.
Every trader needs a trading journal. Use this link to get the discount. Raising the interest rate curbs inflation and lowering the interest rate promotes economic growth. Remember that business investment encompasses investments made in any profit-making venture; it could be in agriculture, in the financial markets, or the informal sector.
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As a result, increased business investment lowers the rate of unemployment in the economy. Conversely, when business investment decreases, it could imply that economic activities are being scaled down. Scaling down operation implies that less labor will be needed. The result is an increase in unemployment levels.
More so, scaling down operations implies low economic outputs hence lower levels of GDP. Business investment goes hand in hand with the level of demand in the economy. Business investment can be said to be responding to levels of demand. Therefore, when business investment increases, it means that there is a higher demand in the economy. By itself, the increased demand means that other aspects of the economy, such as the labor market, are performing well. On the other hand, decreasing business investment means that demand is falling.
Demand Reduction is synonymous to a contracting economy. The business investment data can also be used to analyze the business cycles and, as a result, help in forecasting recessions and recoveries in the economy. Using historical data on business investment, we can establish a pattern. This pattern will show us periods when business investments were slowing down, when they were stagnating, and when they were rapidly increasing.
Naturally, periods when business investments are increasing can be regarded as the expansion stage. The recession stage is characterized by a continuous fall in business investments. When business investments have stagnated, this period could be considered the peak of the business cycle. Towards the end of the first quarter of , business investments dropped continuously. The continuous drop in business investment was because investors anticipated the demand in the economy to be severely depressed, especially in the consumer discretion industry. While other sectors of the economy saw some increased investments, most sectors experienced a drastic reduction in business investments.
The primary goal when making any investment is to earn profits. In this instance, due to the social distancing rules, massive losses were forecasted across the economy.