What is Fundamental Analysis?

The Forex Fundamental analysis identifies and measures economic date like inflation, unemployment, political environment and more.

A fundamental analyst will study the supply and demand for a country’s currency, products or services, it’s management quality and government policies, it’s historic and forecast performance, it’s future plans and for the shorter term all of the economic indicators. From all of this date the trader creates a model using all of these indicators. The idea is that unmatched increases in supply tend to decrease the currency value. On the other hand unmatched increases in demand tend to increase the currency value. At this point the analyst estimates the intrinsic value and compares it to the current exchange in order to decide if to open a trade, with what currencies and at what rate.

There are three main macroeconomic factors a trader should focus in when analyzing the foreign exchange rates:

Interest rates: Each currency has an overnight lending rate which is determined by the country’s central bank. Lower interest rates usually lead to the value of the country’s currency to decline, mostly due to traders who execute carry-trades.

Employment: The unemployment rate is a key indicator of the economic strength. A high unemployment rate in a specific country means its economy is not strong enough in order to provide people with jobs which lead to decline in the currency value, and the other way around.

Geopolitical events: Drastic political events can influence the decrease and increase of a currency or a few currencies.

 

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