Market Fundamental Analysis
In this article
Fundamental analysis may seem like a thing that your economy teacher yelled at you in your high school.
Well, he/she wasn’t wrong.
Fundamental analysis is a type of market analysis in which you look at the market by examining economic, political, and social factors that can affect currency prices.
The central concept of fundamental analysis is that if a country is politically stable and has a growing economy, it has a strong currency.
Let’s dig deeper into fundamental forex analysis.
Forex market fundamental analysis explained
Fundamental analysis of the forex market has a different role. It includes various external, non-market factors: political, economic, social, and statistical. In other words, the fundamental analysis provides an analysis of all events that can affect the market.
The better the country’s economic situation, the more active investors invest in the national currency of that country.
If the economic condition is good, every trader trusts it, and they feel comfortable buying it. Swiss Franc is one of those currencies. Switzerland’s economic and political situation is stable, and that’s it is considered one of the safe-haven currencies.
To apply fundamental analysis in your trading strategies, it’s pertinent to know about political, economic news that can impact currency rates. This requires an understanding of economics and geopolitical factors.
But you would be thinking, “How the hell would I keep up with the news?”
Don’t worry as there are many financial news sites you can look for.
You should look for economic data like interest rates, inflation, GDP (gross domestic product), etc.
If you don’t think news can’t affect the forex market, you live under a rock. Sometimes, a pair can go up or down 100 pips before or after the major news.
That’s why traders put special heed to economic releases.
Key indicators for fundamental analysis
Like any other analysis, there are some defined and major indicators for Market fundamental analysis of forex trading markets.
Now we are going to talk about the major indicators which are considered important during fundamental market analysis.
A country’s economic situation can be determined by its capability to counter any uneven or sudden situation. A country with a good economy can be at its best to face an uneven situation.
The economic indicator may vary from situation to situation, and this variance affects the currency value. The major contributors are Inflation, interest rates, and GDP.
The simple formula of understanding forex fundamental analysis is:
The good economic situation of a nation leads to higher currency value.
Conversely, the unstable economic situation of a nation leads to currency devaluation.
For example, USD is gaining strength with every passing year because of the strong economic situation of the United States. While other economically unstable countries like Venezuela have a weak economic situation because they face war situations, their currency has a lower currency value.
Of course, the most striking event in this category is the political factors like upcoming elections, change of government, etc. As a rule, these factors cause increased fluctuations in the national currency exchange rate (increase volatility). If the likelihood that the upcoming elections could lead to a government change is high enough, then political instability will lead to depreciation.
Any social situation or crisis is directly or indirectly interlinked with the currency value of the country. A sudden event like an earth Quake, Climate change, or any natural disaster can result in the devaluation of the currency.
Forex fundamental analysis strategies
Some of the best forex strategies based on fundamental analysis are:
1. Carry trading
Carry trading has a uniqueness when comparing with other techniques. This approach doesn’t rely on currency price movements; instead, it uses the interest rates of two corresponding currencies. For example, if a trader selects GBP/USD, by applying carry trading, he/she will look at the interest rates of Britain and the U.S.
2. News trading
As mentioned earlier, news can have an impact on the forex market. It seems like the market just sways away after the major news.
For instance, when many European countries announced lockdowns, it affected the price of GBP/USD.
3. Sentiment trading
As the name suggests, sentiment trading is all about the overall market sentiment. Some traders may go bullish; some may go bearish. Sentiment trading combines other traders’ styles, giving the overall feel of the market.
Traders can benefit from sentiment trading when there is a major news event like the presidential elections. These types of events can raise market volatility, and traders can benefit from them.
Pros of fundamental analysis
- The ability to see the whole economic picture as a whole (no other type of analysis does this)
- Ability to understand and predict market movements (technical analysis only shows, and fundamental – explains)
- The ability to assess the prospects for an economy or a particular industry/asset class.
Cons of fundamental analysis
- Too many influencing variables.
- The need to continually follow the news.
- The fundamental analysis must be combined with other types of analysis, like technical analysis, to focus on a particular currency pair.
Fundamental analysis vs technical analysis
It is important to understand that forex market analysis cannot be complete if you use only one type of analysis. Such trading will not yield significant results.
Let’s say you want to buy a currency pair USD/CHF. You did a technical analysis and find out that the pair has good profit potential. But don’t just jump to the conclusion yet.
Through fundamental analysis, you find out that the political situation in the U.S. is unstable. Would you buy a pair?
As you can see, both types of analysis are necessary for forex trading.
Forex market fundamental analysis is a simple way to analyse different situations affecting the value of a currency.
Fundamental analysis is useable for long-term investors, financial advisors, value investors, and fund managers. However, as a retail trader, you can also utilise fundamental analysis.
Remember that the key to successful trading is to combine fundamental analysis with technical analysis.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst