For very many years the core of analysis in the currency markets was fundamental analysis however in the past few years this has been increasingly replaced by technical analysis. So, is forex fundamental analysis dead?
Fundamental analysis is in essence a case of examining the economic and political events which may affect currency prices and these events filter through into things like a country's published economic policy, growth rates, inflation and unemployment rates. So, by understanding the historic effects of economic and political events on a country's currency traders are able to predict the effect which present events will have upon the currency today.
Just like other markets the forex market is affected by supply and demand which are themselves influenced by economic conditions. In particular, supply and demand are affected by the strength of the economy (as seen in its gross domestic product, foreign investment and trade balance) as well as by interest rates.
For the forex trader fundamental analysis involves looking at current economic conditions which can be seen through the various indicators like producer price indexes, consumer price indexes, durable goods orders and retail sales which governments publish on a regular basis.
One key indicator for forex traders are interest rates as movements in interest rates can both weaken and strengthen currencies. For example, while high interest rates may cause stock market investors to sell in the belief that rising interest rates will create higher borrowing costs for companies hitting their share price, those same high interest rates may also strengthen the local currency making it an attractive currency to trade.
Yet another key set of indicators for the forex trader are international trade indicators. Whenever a country is showing a deficit on its trade balance this is normally seen as an unfavorable sign as money flowing out of the country to pay for imported goods and services may well devalue the currency. For the foreign currency trader however fundamental analysis might well show that market expectations mean that in certain circumstances a trade deficit is not at all bad. For example, many countries often operate with a trade deficit and so unless there is an abnormal increase in this deficit then the currency already reflects this fact.
In the United States there are presently approximately twenty-eight major economic indicators which forex traders use to make their trading decisions because these indicators have a significant influence on the behavior of the financial markets. At the same time countries around the globe with frequently traded currencies also produce a similar set of indicators which once again have a significant influence on their own markets. Foreign currency traders need therefore to familiarize themselves with these indicators and need to have at least a basic understanding of exactly how they influence currencies.
Fundamental analysis is not easy and requires traders to deal with large quantities of data which often require quite extensive analysis. These days however the advent of high-powered personal computers and broadband Internet access mean that foreign currency traders can now not only quickly access the data that they need to carry out fundamental analysis but also have access to a number of very powerful programs with which to analyze the data at the click of a mouse.
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