All Forex traders rely on analysis for planning their trading strategies. Analyses are of two types – fundamental and technical. Fundamental analysis refers to the economic and political conditions that affect the currency prices of a country.
Fundamental analysis relies on news reports for gathering information about economic policies, unemployment rates, economic inflation, geographical conditions and growth rates.
Fundamental analysis is generally used as an overview of movements of a currency. It also provides a wide picture of the economic circumstances that has a direct effect on a specific currency. This analysis is used by traders to supplement their findings of the technical analysis for effective Forex trading.
Currency prices are usually affected by supply and demand, which on the other hand is affected by the economic conditions. The two significant economic factors that affect supply and demand are rates of interest and the economy’s strength. The economy’s strength is affected by the trade balance, Gross Domestic Product (GDP) and foreign.
A range of indicators are released by the academic and government sources. They are dependable measures of the present economic well being and are usually followed by nearly all the sectors of the investment market. Indicators are generally released on a monthly basis but there are some which are released weekly.
The two most important fundamental indicators are the international trade and interest rates. The other indicators are the Producer Price Index (PPI), Retail Sales, Durable Goods Orders, Purchasing Managers Index (PMI) and the Consumer Price Index (CPI).
Deficit trade balance (more imports than exports) are unfavorable indicators as it indicates that money is flowing out of a country for purchasing foreign made goods, which may have a devaluing effect on the currency.
Interest rates can either weaken or strengthen a particular currency. High interest rates draw foreign investments which strengthens the local currency. In contrast, stock market investors frequently respond to increase of interest rate by selling their holdings believing that higher borrowing costs will have an unfavorable effect on many companies.