Fundamental analysis is one of the several words you’ll come across as a beginner in Forex trading. The word may sound ambiguous but it is a simple term you’ll need to know when dealing with the Forex market.
In this article, we’ll learn about fundamental analysis. Let’s get right into it.
What is Fundamental Analysis?
Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect currency prices. It is supply and demand that determines price, or in our case, the currency exchange rate.
Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.
In other words, you have to look at different factors to determine whose economy rocks, and whose economy sucks.
You have to understand the reasons why and how certain events like an increase in the unemployment rate affect a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, its currency should strengthen.
Related Content– What is Technical Analysis?
The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets. For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving.
As a result, the value of the U.S. dollar will likely increase against other currencies with lesser demand. Since currencies are always paired, their performance is determined relative to that of another currency.
Later on in the course, you will learn which economic data points tend to drive currency prices, and why they do so. You will know who the Fed Chairman is and how retail sales data reflects the economy.
To be able to use fundamental analysis, it is essential to understand how economic, financial, and political news will impact currency exchange rates. This requires a good understanding of macroeconomics and geopolitics.
No need to be intimidated by such fancy-sounding words though. For now, just know that fundamental analysis is a way of analyzing the potential moves of a currency through the strength or weakness of that country’s economic outlook.