Fundamental Analysis

Fundamental analysis involves studying a country's economy to predict the value of that country's currency. Fundamentalists try to forecast future price movements by looking at economic, political, environmental and social forces that influence a country's economy. Fundamental analysts consider that economic fundamentals are the primary drivers of currency prices.

The idea behind fundamental analysis is that if a country's economy is doing well, their currency will also be doing well. This is because the better a country's economy, the more trust other countries have in that currency. The opposite is equally true. For example, during 2007/08 the U.S. dollar weakened significantly because of deteriorating economic conditions in the U.S. As the economy worsened interest rates were reduced to boost economic activity. As a result, the value of the dollar continued to slide.

Fundamental traders look out for scheduled economic news releases throughout the day. They regularly consult economic calendars, which disclose the dates and specific times of those releases. The calendars also include speeches by prominent politicians, economists, and other technocrats, such as:

• Chairman of the Federal Reserve Bank of US (the Fed)
• Secretary of the Treasury
• President of the European Central Bank
• Governor of the Bank of England, etc.

Traders pay close attention to the speeches of these prominent people, looking for hints regarding future monetary policy that may impact the Forex market.

Here is a summary of the most powerful economic figures that move the forex market.

Interest rates Traditionally, if a country raises its interest rate its currency will strengthen because investors will shift their assets to that country to gain higher returns.

Employment situation Decreases in employment are considered signs of weak economic activity that could eventually lead to lower interest rates, which has negative impact on the currency.

Trade balance, budget and treasury budget A country that has a significant Trade Deficit will generally have a weak currency as there will be continuous commercial selling of its currency.

Gross Domestic Product (GDP) GDP is reported quarterly and is followed very closely as it is a primary indicator of the strength of economic activity. A high GDP figure is usually followed by expectations of higher interest rates, which is mostly positive for the currency.