Fundamental Analysis (definitions)
From macroeconomic data to NFPs and the FOMC, in this article you can learn all the important terms you need to know when you first start learning about fundamental analysis.
- Macroeconomic data – data relating to the performance of the economy as a whole. It might refer to economic growth (e.g. GDP reports), employment (e.g. unemployment rate) or inflation (e.g. CPI reports). It is usually prepared and released by national statistical offices and other state institutions, for instance, US Census Bureau or US Bureau of Labor Statistics.
- Inflation - represents price changes over a period of time. If there is an increase of an average price level, the purchasing power of a given currency declines. As a result, the general level of prices for goods and services is rising. The opposite of inflation is deflation – a scenario when prices generally fall in an economy.
- Unemployment – a term that refers to individuals who are employable and actively seeking a job, but are unable to find a job at the present moment. It is often measured by the unemployment rate (dividing the number of unemployed people by the total number of people in the workforce).
- NFP (Non-farm payrolls) – key labour market report from the United States released monthly, usually on the first Friday of every month. The headline figure measures the number of jobs added or lost in the US economy (excluding the farming industry) over the last month. The report is of great importance for the markets, as it shows the performance of the world’s largest economy.
- GDP – the term stands for gross domestic product, which measures the monetary value of final goods and services (those that are bought by the final user) produced in a country in a given period of time, usually a quarter or a year. It has become widely used as a reference point for the health of the economy (either national or global).
- Interest rates – in general, this refers to the amount one is charged for borrowing money – a percentage of the total amount of the loan. As far as the financial markets are concerned, key benchmark interest rates are set by central banks. This impacts the economic growth, inflation and the strength of the local currency.
- Hawks and dove – terms describing the preferable monetary policy of certain people, usually with regard to central bankers. Hawks favour tight policies (e.g. higher interest rates) in order to keep inflation in check. On the other hand, doves opt for expansionary monetary policies (e.g. lower interest rates or QE), which are the measures expected to boost the economy.
- Macroeconomic calendar – a calendar that contains economic releases, which are crucial from investors’ and traders’ perspective. Day traders usually focus on the day ahead, thus looking for the most important events during the upcoming trading day. The most important economic prints are usually marked with three dots/stars – such reports often “move” the markets.
- Central bank – a financial institution that is responsible for overseeing the monetary system and conducting monetary policy. Most central banks have specified goals, such as keeping stable prices or achieving maximum employment. In order to pursue its goals, a central bank is easing or tightening the money supply and availability of credit (e.g. interest rates mechanism) or sets requirements for the banking industry.
- ECB – the European Central Bank. The central bank of the 19 European Union countries which use the euro. Its primary objective is to maintain price stability. The Bank is headquartered in Frankfurt, Germany. The current President of the ECB is Christine Lagarde.
- Fed – the Federal Reserve System is the central bank of the United States. Its main goals include: stabilising prices, maximising employment and moderating long-term interest rates. The Federal Reserve System consists of 12 Federal Reserve Banks. The current Chair of the Fed is Jerome Powell.
- FOMC – the Federal Open Market Committee. The monetary policymaking body of the Federal Reserve System. It is composed of 12 members. The FOMC schedules eight meetings per year, but can also hold unscheduled meetings if necessary. There is a policy statement issued after each meeting. The document summarises the Committee’s economic outlook and decisions taken during the meeting.
- BoJ – the Bank of Japan. The central bank of Japan, responsible for issuing and handling the Japanese currency (the yen - JPY) and implementing monetary policy among other activities. The Bank is headed by the Governor Haruhiko Kuroda.
- BoE – the Bank of England is the central bank of the United Kingdom. It issues the currency (the pound sterling – GBP) and oversees monetary policy. The current Governor of the BoE is Andrew Bailey.
- RBA – the Reserve Bank of Australia is the central bank of Australia. Its duty is to contribute to the stability of the currency (the Australian dollar – AUD), full employment, and the economic prosperity and welfare of the Australian people. The current Governor of the RBA is Philip Lowe.
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