3 Most Important Forex Fundamental Indicators

There are many fundamental indicators available to the Forex traders today. If you count all of them only for the major currency pairs you’ll get more than a hundred distinct indicators — macroeconomic, monetary, economical, financial, weather-based, etc. For many traders it’s difficult to follow all of them, as it requires time and efforts in addition to the necessity to learn about the effect of all these fundamental indicators on various currency pairs. This article lists 3 most important (in my humble opinion) fundamental indicators that have the highest impact on the currency rates and are quite easy to follow as they are reported not so often.

• GDP or Gross Domestic Product is the main indicator of the macroeconomic strength of the country. The growth of GDP signals a stronger economy and a more competitive currency because the global investors will have to buy this currency in order to invest in this country, and they will want to invest in it because its economy is growing. GDP reports are usually published quarterly but they have three states of revision (advance, preliminary and final) published with the monthly intervals. GDP strongly affects currency pairs both in short-term and long-term. You’ll have a trading opportunity during the time of the release, as the volatility spikes up, and you’ll be able to adapt your long-term positions to the new data after the release.


• Interest Rates are set by the world’s central banks and are the main tools of the monetary regulation. Higher interest rates provide more value to the affected currency, while the lower interest rates decrease the value of the currency. Interest rates are usually revised every month or two during the special monetary policy meetings of the central banks. Interest rate decisions greatly depend on the growth of GDP and other macroeconomic indicators. Currency pairs react with the high volatility to the unexpected interest rate changes. It’s important to monitor the trends in the interest rates to forecast the long-term trends of the traded currencies.


• Unemployment Rates are influential indicators both for currency traders and for the monetary authorities when they set the interest rates. Non-farm payrolls are considered to be the most important of the unemployment indicators in USA and they are released monthly. Major currencies usually react with the short-term tendencies to such releases. Weekly reports on jobless claims can also be considered but they aren’t as influential.

In many cases it’s enough to be up to date with these fundamental indicators to understand the possible market trends in Forex. But, of course, if you wish to get a more detailed picture you shouldn’t limit yourself only with these indicators, especially if you pose yourself as a pure fundamental currency trader.

Why do Forex Brokers Pay or Take Overnight Interest?

With most Forex brokers when you leave a currency pair position open over the night you’ll get a swap or an interest payment for it. It can be positive (you actually gain money) or negative (you lose money). That payment is usually very small and the majority of the beginning traders just don’t pay any attention to it, since their direct profit or loss from the trading is much greater than this rollover interest. But why do the brokers pay and take this overnight interest payment or swap? And why do some brokers promote interest-free accounts?

The origin of the overnight interest is the fact that in the retail Forex market the physical delivery of the currencies is absent. If you buy €100,000 with your leveraged $1,000 the broker won’t transfer those €100,000 to your bank account. But you’ve paid $100,000 for those euros, even if you borrowed them from your broker. So, if the Forex broker doesn’t deliver the currency to you they technically borrow it from you. In the abovementioned example you borrow $100,000 from the broker and the broker borrows €100,000 from you. And where you have the debt and the loan, there you have the interest rates. The interest rates for the overnight interbank lending (and that’s what you are doing when trading Forex on leverage) are set by the central banks. For example, the rate that you pay for borrowing the dollars from your broker is set by the Federal Reserve System, while the interest rate that the broker pays to you for borrowing the euros from you is set by the European Central Bank. The difference between those two rates is the final overnight interest or swap rate.

Let’s look at this rate calculation. You buy a standard lot (100,000 units) of EUR/USD with your account being in the U.S. dollars with the leverage of 1:100. The current Fed rate is 0.25% and the current ECB rate is 1.5%:

1. You use $1,000 as the margin.
2. You borrow $100,000 from your Forex broker.
3. You buy €100,000 with the borrowed money.
4. You lend €100,000 to your broker (because it won’t deliver the currency to you, anyway).
5. You need to pay 0.25% yearly or 0.00068% daily for your borrowed $100,000.
6. Your Forex broker needs to pay 1.5% yearly or 0.00411% daily for its €100,000 borrowed from you.
7. In the end, the broker needs to pay the difference between €4.11 and $0.68 for each day that your position is open. That’s your positive swap or overnight interest.

What would happen if you didn’t buy that standard lot of EUR/USD but went short on it instead? You’d have to pay that difference to your broker.

The problem is that in reality brokers don’t pay or take the exact amounts for the overnight interest. They minimize the swap if they pay it out and maximize if you do. That way they try to avoid the risks. But that’s certainly not very fair.

Why do some of the brokers claim that they don’t pay or take overnight interest? Because the interest is viewed inappropriate by one of the most popular religions in the world — Islam. Some Forex brokers offer interest-free accounts by request and charge a fixed commission per trade to compensate their interest-based losses. Some brokers provide only interest-free accounts and usually don’t charge any commissions in that case.

How can you gain advantage from the overnight interest? First, you can use it for carry trade. When you feel that the currency pair with the big positive interest rate difference is going to remain stable or move in your favor for a long period of time you can use the broker’s leverage to receive some ridiculously high interest rate from the swaps only. Another way is to open an account with two brokers — one that offers no-interest policy and another — with the common Forex broker. This way you can hedge your positive interest rate difference position with the no-interest rate position on another broker. In this case you won’t be bothered by the market movement but at the same time you will gain advantage from the positive overnight interest. Of course, such practice is usually considered illegal by the brokers with no swaps, so, I wouldn’t recommend using it.

Double Impact of the Interest Rates on Forex

The interest rates, set by the world’s central banks, are widely used in the Forex trading. Their changes are monitored by the traders and investors because the interest rates determine the fundamental value of the currencies. It’s important for every Forex trader to understand the impact of the interest rates on the currencies he trades on. It’s easy to find the interest rate table to know their latest values, but how to interpret them?

In general, the higher the interest rate associated with the currency is, the better it’s for that currency. Higher interest rates attract investors, because they offer a higher yield. Forex traders prefer buying high-interest currencies versus the low-interest ones to gain the difference yield (such trading technique is called carry trade).

On the other hand, the lower interest rates are usually more popular among the traders when the global volatility rises and the world’s financial system experiences problems. The current financial crisis shows that the currencies with the lower yield are the favorites, because they are less risky than he high-yielding ones.

So what to do and how to react on the interest rates? The volatility index (VIX) is a good tool to measure the global interest rates preference. If it’s below the «normal» level of 30%, the high interest rates act as the attractors and the currencies that have high yield grow. If the index jumps up above that level, the traders prefer to move into the less risky assets and the low interest rate currencies gain.