Fundamental Analysis forex trading

Forex traders can broadly be divided in to two types based on the way in which they analyse financial markets for trading opportunities. The first group are technical traders, who study price charts and apply technical indicators to look for visible patterns which confirm a trade setup. The second can be considered as fundamental analysts, who look for the larger, underlying trends which drive markets higher or lower. Whilst many traders will not necessarily be puritans of just one of these analytical techniques, it is likely that personal trading preference will lean towards one of these ways to anticipate if forex pairs will move higher or lower.

What is Fundamental Analysis?

Fundamentals analysis, as the name suggests, looks at the real reasons behind market movement and the interaction of global events, information and policy changes which shift the supply and demand of currencies around the world. Although this may initially sound like a fairly vague and unscientific way to analyse financial markets, it can be done with a high degree of accuracy and seeks to determine the way in which global events are intrinsically linked to the markets through the confidence of market participants. The concept of Fundamental analysis therefore involves being able to understand the influence of real-world information on the forex markets.

Fundamental analysis of key economic indicators

The most obvious fundamental influences on the forex markets are the release of information demonstrating the health of an economy, known as key economic indicators. These include an individual country’s GDP or employment figures and also the interest rate policies of central banks and the Federal Reserve. Any one of these will influence the underlying demand for a currency due to the fact that they give an indication of the general trend within the forex market for the foreseeable future. Perhaps the most famous example is the US Non-Farm Payroll (employment figures) data releases which occur each month. v use this as a proxy for the health of the US economy which in turn affects the prognosis for inflation and interest rates in the future and therefore the demand for the US Dollar.

The influence of interest rates on forex

Understanding of inflation and interest rates are absolutely critical for effective fundamental analysis. Since many large financial institutions trade in many millions of Dollars’ worth of currency, a fractional change in an interest rate can result in very large profits or losses. Since the possibility of a rise in interest rates increases following periods of high inflation, economic news relating to house and consumer prices suddenly become highly influential on the value of a currency.

Fundamental analysis of global events

Fundamental analysts also focus highly on global events, both natural and political. The status of some currencies, such as the US Dollar, as ‘safe haven’ currencies means that demand for this will increase with any indications of global instability. Natural disasters and outbreaks of war in strategic locations will cause the US dollar to rise as investors look for to avoid high-risk currencies which may be exposed to these catastrophes. Similarly, the electoral success of a particular politician can have both positive and negative effects on the demand for a currency. Fundamental forex analysis therefore attempts to foresee the effect on currencies that these events create and take advantage of shifts in market sentiment as a result.