the fundamentals of the economy

Running Head : Fundamentals of Economy

Fundamentals of Economy

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Introduction

To determine the true health of economy , we should look at the most important fundamental variables and try to compare them . These variables will change year to year as international trade dynamics evolve and central bankers and investors redirect their fixations . Most investors look at three key variables : monetary indicators , economic indicators and sentiment

Interest rates reflect how much you get paid for holding a currency which is why rates drive the

Forex Market . Interest rates are set by a combination of central banks decisions (which set short term rates ) and the bond market developments (which determine longer term rates . If interest rates are going up it tends to suggest the economy is in a growth spurt (Thus central bankers are inclined to ward off inflationary pressures with higher rates ) The currency tends to appreciate as a result . If interest rates are neutral or going down , it typically means growth is slowing (as bond markets bring long term rates down in the expectation that central bankers will offer more lax monetary policy , and the currency tends to depreciate as a result

Economic Indicators can be broken down as follows : Leading indicators corporate sector , manufacturing , unemployment and inflation . The reason you should care about economic indicators is because they drive the interest rate outlook . Remember , a growing economy can offer a higher yield

Leading Indicators are those that tend to change before the wider economy changes . They should give your fundamental analysis a forward-looking bias since they are the best gauge for what is shaping the economy . While there are many leading indicators , the US housing market is an excellent example . Building and buying a new home usually suggest extensive outlays (homes need to be constructed , financed and furnished , thus developments in the housing market usually precede developments in linked industries

While the consumer is a key to the economy , the corporate sector is also important . If companies are making money , they are more likely to invest , expand and employ . Attracting the attention of politicians central bankers , and investors , job creation acts as the backbone of a healthy economy . Assuring US consumers of a healthy job outlook loosens the wallets of a consumer-driven economy . By loosening their wallets new jobs create difficulties for central bankers who look for signs of tightness in the labor market that create inflationary pressure

Inflation is the result of a growing economy since businesses will increase their prices when consumers buy more . Central bankers weigh both inflation and economic growth when setting short-term interest rates . If they think inflation is above their comfort level , they will raise interest rates and vice versa . Inflation is affected by supply as well . This sort of price pressure is most commonly seen in the cost for food and energy , making the prices paid for these goods less controllable and volatile

Conclusion

The currency market is a living , breathing market driven by the choices of individuals . Sentiment...