Forex Fundamental Analysis Is Certainly Not Dead

By Author: Donald Saunders
Total Articles: 84
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For many years the core of analysis in forex trading was fundamental analysis however in the last few years this has been replaced to a large extent by technical analysis. So, is forex fundamental analysis dead?

Fundamental analysis is basically a case of examining the political and economic events that might affect currency prices and these events filter through into such things as a country's published economic policy, growth rates, inflation and rates of unemployment. So, by studying the historic effects of political and economic events on a country's currency traders are able to predict the effect that present events will have upon currency prices today.

As with other markets the forex market is affected by supply and demand which are themselves influenced by economic conditions. In particular, supply and demand are affected by an economy's strength (as seen in its foreign investments, gross domestic product and trade balance) as well as by interest rates.

For forex traders fundamental analysis means looking at current economic conditions which are reflected in the many indicators like consumer price ...
... indexes, producer price indexes, durable goods orders and retail sales which governments publish periodically.

One central indicator for forex traders are interest rates as changes in interest rates can both weaken and strengthen currencies. For instance, whilst high interest rates may trigger stock market investors to sell in the belief that rising interest rates will also lead to higher borrowing costs for companies hitting their share price, these same high interest rates could also strengthen the local currency so that it is an attractive currency to trade in.

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

In the United States there are presently about twenty-eight major economic indicators that traders use to make their trading decisions as all of these indicators have a strong influence on the behavior of the financial markets. At the same time other countries around the world with well traded currencies also publish a similar set of indicators that again have a significant influence on their own markets. Currency traders must therefore be familiar with these indicators and have at least a working understanding of just how they affect currencies.

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