Forex Markets: Introduction to Fundamental Analysis

Forex Markets:  Introduction to Fundamental Analysis

If you have had any exposure to the forex markets, it is highly likely that you have heard the term “fundamental analysis.”  This term is often included as part of the debate that exists between “price-based” and “economically-based” traders.  But what does the term refer to, exactly?  How can traders use “fundamental” knowledge and logic to place actual trades in the forex markets?

Focusing on Economic Statistics

Specifically, when traders mention “fundamentals” what they are actually talking about is the economic statistics of the country in question.   “This information is helpful for traders who are looking to assess the financial strength or weakness of a given country,” said Rick Bartlett, currency analyst at CornerTrader.  “These pieces of information tend to have a very clear impact on the long term prospects for the value of the currency in that region.”  Economic fundamentals focus on a large and varied collection data reports.  This information is usually released on a pre-determined schedule that is established in advance by the government of each country.

In addition to this, analyst reports can also have a major impact on market expectations.  This, of course, is not something that is released by a government but by groups of people working in private companies.  In the most extreme cases, you might see things like credit downgrades (or upgrades) from ratings agencies, and these releases tend to generate volatile reactions in the forex markets for investors viewing prices on both short and long term time horizons.

Fundamental Data Comes in Many Different Forms

At its core, fundamental analysis is the application and study assessment of economic data releases and geopolitical news events.  These assessments are viewed in terms of the ways that they are able to affect currency values, as real world events that are occurring around us will inevitably impact market forces and have a large impact on the ways that people make purchases on a daily basis.  Macroeconomic factors, such as national growth rates, employment rates and inflation rates are key in understanding the ways investors will make trading decisions, so it is highly important to monitor these economic releases before committing to new forex positions.

But not all of these releases are the same.  And, in fact, some of these reports will be interpreted very differently when viewed as a relative comparison.  Strength or weakness in a report from the Federal Reserve that describes New Home Sales will not give investors the same results as an Interest Rate decision or a change in monetary policy.  An increasing unemployment rate is generally negative for a currency, whereas rising GDP is going to be viewed as a positive.    In any case, you can be sure that all of these releases will have some impact on the viewpoint of the market, and that some reaction will take place once the data is made available for public consumption.