Fundamental Analysis

Forex and other CFD markets do not just run randomly over the course of trading hours. There are invisible forces driving the market, shaping the trends and the pricing the currencies involved. Traders look for signs and patterns, using charts and tools to decode these mechanisms over time as they master trading skills. 

But before going into all that detail, one must first cover the fundamentals of economic analysis and it is actually easier than it sounds. 

Forex is currency trading and currencies reflect the strength and stability of a country’s economy. If a country’s economy is doing well at the moment and if the near future is also promising, everyone expects that currency to be highly valuable.

it is supply and demand that determines a currency’s price when it comes to the currency exchange rate. If country A has a stronger economy with a foreseeable success in the near future compared to country B, then currency A will be stronger over currency B.

Because the better a country’s economy is, the more foreign businesses and investors will invest there. This means more jobs, a more vibrant market and more spending. This results in the need to purchase that country’s currency to obtain those assets for traders and investors around the world.

Therefore, using supply and demand as an indicator currency price is somewhat easy. Many people who are familiar with the current economic and political affairs in the world would have a broad idea about how a country’s economy is doing at the moment. But the hard part is analyzing all the factors that impact the economy as well as the supply and demand for that particular currency.
 

Economic Outlook

So, fundamental analysis is a way of analyzing the potential moves of a currency through the strength or weakness of that country’s economic outlook. If said outlook is positive and promising, fundamental analysts argue that the currency is likely to attract attention and thus gain value. Otherwise, if there is an ongoing political or economic problem within a country, it is likely that the currency will suffer a fall.

In general, when analysts say fundamentals, they really mean economic fundamentals of a country that a currency belongs. And fundamental analysis takes all the economic factors into account when analyzing a currency: unemployment, interest rates, politics, development indices, central bank decisions and so on.
Skill, knowledge and experience to analyze an economy thoroughly is not easy. While it is a good idea to always do your own research, we suggest that you follow independent analysts and get a broad idea about a market’s direction, expectations and upcoming major events in a country so you can trade confidently.

Obviously, there is more to understanding an economy than simply following up on the latest economy news and developments in a country. That is where Technical Analysis and Market Sentiment Analysis come into picture and we will discuss them in our next articles.