Fundamental analysis: interest rates, central banks, inflation, jobs data and the economic calendar
Fundamental analysis studies the economic forces that change a currency's value over weeks, months and years. Even if you mainly use charts (technical analysis), you must know when big news is coming, because news can move prices by more in one minute than in the rest of the day.
The big idea: currencies reflect economies and interest rates
A currency is like a share in a country's economy. Money tends to flow towards:
- higher interest rates (better returns on deposits and bonds), especially when rates are expected to rise;
- strong, stable economies with controlled inflation;
- safety during fear and uncertainty.
Markets trade expectations. If everyone expects a rate rise, it's largely "priced in" before it happens. Prices move most when results surprise the forecast.
Central banks: the most important players
| Central bank | Currency | Key decision |
|---|---|---|
| Federal Reserve (Fed), USA | USD | Federal funds rate (FOMC meetings) |
| European Central Bank (ECB) | EUR | Main refinancing rate |
| Bank of England (BoE) | GBP | Bank Rate |
| Bank of Japan (BoJ) | JPY | Policy rate, bond-buying policy |
| Swiss National Bank (SNB) | CHF | Policy rate; known for surprise interventions |
| Reserve Bank of Australia (RBA) | AUD | Cash rate |
| Bank of Canada (BoC) | CAD | Overnight rate |
| Central Bank of Kenya (CBK) | KES | Central Bank Rate (Monetary Policy Committee) |
What to follow:
- Rate decisions and, even more, the statement and press conference (hints about future moves).
- "Hawkish" = leaning towards higher rates or tighter policy (often supports the currency).
- "Dovish" = leaning towards lower rates or looser policy (often weakens the currency).
- Meeting minutes and speeches by central bank officials.
Key economic indicators
| Indicator | What it measures | Why it matters |
|---|---|---|
| Inflation (CPI, PCE) | Changes in consumer prices | High inflation → pressure for higher rates |
| Jobs data (US Non-Farm Payrolls, unemployment rate) | Employment and wages | Strong jobs → stronger economy, possibly higher rates. NFP is one of the most volatile releases (usually the first Friday of the month) |
| GDP | Total economic output | Growth vs recession |
| PMIs (purchasing managers' indexes) | Business activity surveys | Early signal of growth; above 50 = expansion |
| Retail sales | Consumer spending | Consumer health |
| Trade balance | Exports minus imports | Demand for the currency |
| Central bank rate decisions | Policy rates | The biggest scheduled movers |
The economic calendar
An economic calendar lists upcoming releases with:
- Time (set it to your time zone: Nairobi, UTC+3)
- Currency affected
- Impact (low / medium / high)
- Forecast (consensus expectation), previous value, and actual when released
Make checking the calendar part of your daily routine. Many traders:
- avoid opening new trades shortly before high-impact news;
- close or reduce positions before major releases (rate decisions, NFP, CPI);
- wait 15–30 minutes after the release for spreads to normalise and the first chaotic move to settle.
Example: reading a release
US CPI (year on year): forecast 3.0%, previous 3.2%, actual 3.4%.
Inflation came in higher than expected. Traders may expect the Fed to keep rates higher for longer → USD may strengthen (EUR/USD may fall, USD/JPY may rise). But markets can react unpredictably: the details of the report, other news and positioning all matter. Fundamental analysis gives you context and probabilities, never certainty.
Risk sentiment: "risk-on" and "risk-off"
| Mood | What tends to happen (not always) |
|---|---|
| Risk-on (optimism) | Stock markets rise; "growth" currencies such as AUD and NZD strengthen; safe havens weaken |
| Risk-off (fear: crises, wars, crashes) | Money flows to safe havens: USD, JPY, CHF and gold; growth and emerging-market currencies weaken |
Intermarket relationships (tendencies, not rules)
- Oil and CAD: Canada exports oil, so CAD often moves with oil prices.
- Commodities and AUD/NZD: linked to metals and agricultural exports and to demand from China.
- Bond yields: rising US yields often support the USD (especially against JPY).
- Gold often moves inversely to the USD and real interest rates.
These relationships change over time. Use them for context, not as automatic trading signals.
The Kenyan shilling: a real-world example
USD/KES is influenced by:
- Dollar demand from importers (fuel, machinery, manufactured goods) vs dollar supply from exports (tea, horticulture, coffee), tourism and diaspora remittances (a major source of dollars).
- Government external debt repayments (large dollar outflows when Eurobonds or loans are repaid).
- CBK policy rate and interventions.
- Global dollar strength and investor appetite for emerging markets.
Even if you never trade KES, following it helps you understand how fundamentals work in your own economy, and it matters for imports, school fees abroad, and freelance income paid in dollars. Retail brokers rarely offer USD/KES trading, and liquidity is limited.
A simple weekly fundamental routine
- Sunday evening: check the week's calendar; mark high-impact events for the pairs you follow.
- Daily (10 minutes): read headlines from reputable financial news sources; note any surprises.
- Before every trade: "Is there high-impact news on either currency in the next few hours?"
- Monthly: review each central bank's latest stance (hawkish or dovish) for your pairs, in a short table in your journal.
Common mistakes
- Believing a single headline guarantees direction.
- Trading during news with full size.
- Reading social media "predictions" instead of primary sources (central bank statements, official data).
- Ignoring that the market reacts to surprises vs expectations, not to "good" or "bad" news by itself.
Summary
- Interest rates and central bank expectations are the biggest long-term drivers of currencies.
- Inflation, jobs, GDP and PMIs shape those expectations; prices react most to surprises.
- Use an economic calendar daily; avoid trading through high-impact releases as a beginner.
- Risk sentiment and intermarket links add context; nothing in fundamentals gives certainty.
Check yourself
A central bank leaning towards higher interest rates is described as hawkish or dovish?
Show answer
hawkish
What is the name of the monthly US jobs report that often moves markets strongly? (write the abbreviation)
Show answer
NFP
During risk-off periods, does money tend to flow towards or away from the Japanese yen?
Show answer
towards
Prices tend to move most when data differs from what? (one word)
Show answer
forecast