Forex Fundamental Analysis Is Far From Dead

By: Donald Saunders

For many years the basis of analysis in currency trading was fundamental analysis but in the last few years this has been increasingly replaced by technical analysis. So, is fundamental analysis for forex trading dead?

Fundamental analysis is essentially a case of examining the economic and political events that might affect currency prices and these events are reflected in things like a country's published economic policy, growth rates, inflation and rates of unemployment. Thus, by looking at the historic effects of economic and political events on the value of a country's currency it is possible to predict the effect that present events will have upon the currency today.

Just like any other market the foreign currency market is affected by both supply and demand which are themselves influenced by economic conditions. Above all, both supply and demand will be affected by the strength of the economy (as seen in its foreign investments, gross domestic product and balance of trade) as well as by interest rates.

For currency traders fundamental analysis means examining current economic conditions which can be seen through the various indicators such as consumer price indexes, producer price indexes, durable goods orders and retail sales which governments release on a regular basis.

One main indicator for foreign currency traders are interest rates because movements in interest rates can both strengthening and weakening a currency. For example, whilst high interest rates may trigger stock market investors to sell in the belief that high interest rates will mean higher borrowing costs for companies hitting their share price, those same high interest rates might also strengthen the currency making it an attractive currency to trade in.

Another main set of indicators for the foreign currency trader are international trade indicators. Whenever a country shows a deficit on its balance of trade it is normally seen as an unfavorable sign as money leaving the country to pay for imported goods could well devalue the currency. For the forex trader however fundamental market analysis may well show that market expectations mean that a trade deficit in some circumstances is not at all unfavorable. For example, many countries often operate with a trade deficit and so unless there is an exceptional increase in the deficit then the currency already reflects this fact.

In the United States there are currently some twenty-eight major economic indicators that currency traders use to make their trading decisions because these indicators have a strong influence on the financial markets. At the same time other countries around the globe with frequently traded currencies also publish similar sets of indicators that once again have a major influence on their own markets. Forex traders need therefore to familiarize themselves with these indicators and have at least a basic knowledge of exactly how they influence currencies.

Fundamental analysis is far from simple and requires currency traders to work with massive quantities of data which often require quite extensive analysis. These days however the arrival of powerful personal computers and fast Internet access mean that forex traders can now not only easily access the information that they need to perform fundamental analysis but also have access to some very powerful programs with which to analyze that data at the click of a mouse.

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