What is Fundamental Analysis?
Fundamental analysis is the study of all underlying elements that influence the economy status of a particular nation. Fundamental analysis in Forex is very similar to the analysis of the performance of a company. When analyzing a company, we usually look at their financial ratios, company policies, operating environment, etc. While in Forex, we look at the economic indicators, government policies and societal factors that influence the exchange rate of a nation. Those fundamental factors are the market driver that influences the exchange rate. Fundamental analysis is a very effective way to forecast the economic condition of a nation in long term basis. It can't give you an immediate indication of the exchange rate movement when you trade live.
Macro-Economics and Forex
The measure of a nation's economy status is basically quantified by its trade flow. It is a measure of how much money in-flow or money out-flow of a nation. When a nation imports more than it exports, the nation buys more and sells less. This results more money flowing out from a nation than the money flowing into a nation. This is called trade deficit. When a nation exports more than it imports, the nation sells more and buys less. This results more money flowing into a nation than the money flowing out from a nation. This is called trade surplus.
Price quoted in Forex market represents the strength of one currency over another. If a currency of a nation is weakening, trading with this nation is cheaper. Therefore, it actually favors a nation that exports more. Under this situation, money is flowing out from this nation and the economy of this nation goes toward inflation and vice versa. Therefore, a nation's exchange rate decreases during trade deficit but increases during trade surplus. Trade deficit and trade surplus are the main factor that results in the fluctuation of a nation's economic and financial data.
Economic and financial data are the indicators that a Forex trader should monitor to analyze the pulse of the economy health of a nation. Economic data are usually collected and generated by government and some private sectors periodically. The economic data can have an impact to exchange rate movement when it is being released to public. Some major economic indicators are listed below:
Price quoted in Forex market represents the strength of one currency over another. If a currency of a nation is weakening, trading with this nation is cheaper. Therefore, it actually favors a nation that exports more. Under this situation, money is flowing out from this nation and the economy of this nation goes toward inflation and vice versa. Therefore, a nation's exchange rate decreases during trade deficit but increases during trade surplus. Trade deficit and trade surplus are the main factor that results in the fluctuation of a nation's economic and financial data.
Economic and financial data are the indicators that a Forex trader should monitor to analyze the pulse of the economy health of a nation. Economic data are usually collected and generated by government and some private sectors periodically. The economic data can have an impact to exchange rate movement when it is being released to public. Some major economic indicators are listed below:
- Gross Domestics Produce (GDP)
- Industrial Production
- Producer Price Index
- Consumer Price Index
- Non-Farm Payroll
- Unemployment Rate
