Forex fundamental analysis is a method that tries to measure the intrinsic value of currency pairs by examining economic and financial factors. The analysis method focuses on factors that can affect currencies’ value right from macroeconomic factors to state of the economy as well as industry conditions.
Fundamental Forex analysis also pays close watch to interest rates as regulated by central banks as they provide insights on the health of an economy. International trade and manufacturing operations are also keenly examined as part of the evaluation method.
When it comes to forex trading, currency pairs prices fluctuate each and every time. The fluctuation arises as a result of traders reacting to various news releases that hit the market. Fundamental analysts focus on this news release to try and value the strength of each currency.
Below are some of the macroeconomic indicators commonly studied as part of Fundamental analysis.
Interest Rates
Interest rates are a major economic indicator taken into consideration when it comes to valuing the strength of any given currency. Likewise, a central bank hiking interest rate is many, at times, interpreted as strength in the economy.
Conversely, a hike of interest rates many at times results in the strengthening of a currency relative to other currencies. The cutting of interest rates can indicate weakness in an economy, which leads to the depreciation in the underlying currency.
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Inflation
Inflation is another major indicator that fundamental analysts pay close watch to. Given that it represents the cost of foods over a period of time, every country has an inflation level that is considered healthy.
Too much inflation above a given level can tip the balance of supply and demand, consequently, result in the depreciation of a given currency.
GDP
The rate at which the Gross Domestic Product of a country grows can significantly affect the intrinsic value of a currency in the forex market. GDP growth is many at times associated with solid economic growth, a move that often leads to the strengthening of a currency. Conversely, slow growth in GDP many at times arouses concerns in the forex market, resulting in the depreciation of a currency.
Forex fundamental analysis as a method of trying to ascertain the true value of a security value differs a great deal from technical analysis. Technical analysis tries to ascertain the true value of a currency pair through the analysis of historical market data focusing on price and volume.
While Fundamental analysis focuses on the macroeconomic factors likely to influence the intrinsic value of a currency, technical analysis relies on historical price movements.
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