Fundamental Analysis: An Introduction

What is fundamental analysis?

A kind of market analysis that involves studying the economic condition of different countries in order to make the process of currency trade more efficient is known as Fundamental Analysis. It provides information about economic and political events and their impact, which influence the currency market. Fundamental analysis is one of the most well recognized approaches to the analysis of exchange markets.

Fundamental analysis describes the different techniques of present as well as future valuation. These valuations are made using economic, political and social variables. The fundamental analysis approach is best suited for forecasting the long term changes that take place in the Forex market.

The statements and figures which are a part of the speeches of economists and politicians are called economic announcements by traders and have an immense impact on the moves of currency market. The announcements related to the politics and economy of United States are most important. Certain people such as the Secretary of Treasury, Chairman of U.S. Federal Reserve Bank and the like are some people who are often closely watched by the traders.

Employing strategies of fundamental analysis

In order to employ the various strategies of fundamental analysis, one needs to have basic understanding of demand and supply, which is undoubtedly the principal force behind the financial markets. In case of Forex market, the products that are exchanged are different currencies. The global macroeconomics variations can perpetually have a strong impact on the value of currency as their value depend on the economic wellbeing of the particular country.

As a part of the process of fundamental analysis, economists create economic calendars to predict the different types of economic values and figures in accordance with those of previous months. When the forecast obtained from economic calendars improves from the previous months, the value of US dollars strengthens in comparison to other currencies. On the flip side, when the forecast shows depreciated values, the value of US Dollar goes down. Take for example, the price of oil keeps fluctuating in the global market. If the cost of oil increases, the currencies of countries that are depended on huge amounts of oil import, such as Japan and America, are depreciated in value.

Important forces behind movement of Forex Markets

Some of the most important factors which determine the appreciation or depreciation of the value of a currency in the Forex Market are:

  • Rate of Interest
    Usually when the rate of interest in a country rises, the currency of that particular country also strengthens as the investors shift their assets there to gain more returns on their investments.
  • Gross Domestic Product (GDP)
    The GDP or the Gross Domestic Product is the key indicator of the economic strength of a country. Therefore, high GDP leads to high rate of interest which further leads to escalation of currency valu

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