The value of a market changes constantly, changing in response to fundamental factors such as economic growth and interest rates as well as market demand and world events. Here we pinpoint some of the key signals that highlight those market changes.
For example, in the forex market, interest rates, economic data and political news all have a bearing on market prices. The decision to buy or sell a currency is driven by the fundamentals of the market. If you’re trading forex options, you need to take a keen interest in these areas of news to ensure accurate decision-making.
Indicators
Forex isn’t the only market that is affected by fundamentals. In any market, if an investor sees something happening in the global economy that might make an asset strengthen or weaken in value, then they will react.
Commodities, for example, tend to be affected by world events and political news as well as some economic data. If, for example, the US announces reduced building figures for the last quarter, then the price of commodities consumed by the building industry in the US is likely to take a dip.
Leading Indicators
Leading indicators are indicators that tend to change before the economy as a whole changes, and include stock market levels, consumer sentiment and money supply. Leading indicators are used for making short-term predictions about how a market is likely to move, which makes them particularly useful for options traders.
Interest Rates
Interest rates have a huge impact on currency values. This makes them particularly important to forex traders because currencies from economies with higher interest rates tend to be stronger than currencies from economies with lower interest rates because they offer higher yields on investments.
The higher the interest rate associated with a currency, the more traders will want to buy that currency. This increase in demand then leads to an increase in the value of the currency.
Interest rates are set by Central Banks. Traders will pay close attention to Central Bank activity so that they can respond quickly if interest rates are raised or lowered.
Important Central Banks
| Territory | Bank |
| United States | Federal Reserve (The Fed) |
| European Union | European Central Bank (ECB) |
| United Kingdom | Bank of England (BOE) |
| Japan | Bank of Japan (BOJ) |
| Switzerland | Swiss National Bank (SNB) |
| Canada | Bank of Canada (BOC) |
| Australia | Reserve Bank of Australia (RBA) |
Inflation
Inflation is a general rise in prices for goods and services It is important to traders because it is one of the key factors Central Banks consider when making interest rate decisions. This means that a rise or fall in inflation can result in a change in interest rates.
Consumer Price Index (CPI)
This is a measure of the the cost of goods that consumers buy regularly. The more money consumers have to spend on basic goods and services, the less money they have for extra spending.
Producer’s Price Index (PPI)
This is a measurement of how much producers have to pay for the raw materials they need to produce their goods. If these prices rise, producers pass those costs onto consumers, causing a rise in the CPI.
Employment Data
All countries release employment data. However US employment figures are particularly important to the global economy as a whole, so investors around the world will watch them closely. Higher employment figures represent a healthier economy, for a variety of economic reasons.
Manufacturing Data
Any increase or decrease in demand for consumer goods and materials sheds light on the health of an economy, so investors will watch closely to see which are the best economies to invest in.