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Forex Trading: Fundamental Analysis

When deciding on forex strategies, it is often helpful to have some method of analysis that you can use to help you determine what is most likely to happen in currency trading. You can either use fundamental analysis or technical analysis. Fundamental analysis is more of the “big picture” view of the forex market.

While you can use forex trading charts to help you get a more complete picture of foreign currency rates, fundamental analysis focuses more on the underlying factors affecting price movement. The idea is to look at the fundamentals that support a certain foreign currency, most often considering factors that have to do with the economy attached to that currency.

Fundamental analysis makes use of such items as economic policy, political currents, events and the state of the economy (with the help of economic data). In forex trading, these macro-events often influence the way traders view a currency. In foreign exchange trading, perception is important. If political unrest makes forex traders nervous about a certain country’s assets, then that currency is likely to be bid lower when it comes time to make an FX trade.

Economic data is also very important to fundamental analysis. A currency is most often supported well when its economy is growing. In the euro exchange, economic news coming out of Germany plays a big role. When expansion is seen, and when business confidence is high in Germany, the whole euro zone benefits. When the euro zone is perceived as having a stronger economic outlook than the U.S., then the euro currency does better in forex trading.

Another consideration in fundamental analysis is often commodities. With commodity currencies, the way that the commodities market moves is important. These currencies rely on exports – such as oil, timber and precious metals – to support their currency. When global trade is up, commodity currencies normally do well, and forex trading charts are not needed to see that things are going well for certain currencies.

Paying attention to price action is still somewhat important to fundamental analysis, but it is not the only thing. Fundamental analysis requires that some attention is paid to underlying factors when online forex trading decisions are made.

Tags: analysis, Fundamental Analysis

1 Comment to Forex Trading: Fundamental Analysis

1. 

   Yes, to be able to analyse forex market is the first thing any trader you learn how to do. Use the right indicators and interpret what you see. That’s the key to your success.
Jennifer on December 3rd, 2009

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