Forex Fundamental Analysis

Forex fundamental analysis is simply a method of using the "fundamentals" in a certain market to gauge how the currency price will be affected. What are those fundamentals? There are many, but the most important, the "market movers", include the following (not in order):

* Economic conditions
* Political environment, particularly with regard to stability
* Interest rates
* Supply and demand for the currency
* Government policies
* Historic performance of the currency
* International trade position --- deficit or surplus
* Consumer price index (CPI)
* Gross domestic product (GDP)
* Cost of producing goods (PPI)

Who watches these fundamentals and releases the information about them? The central banks of each country are responsible for the economy of the country, so they carefully watch the factors that affect it: the fundamentals. The factors are announced by the central banks regularly, sometimes monthly but often weekly, and the exact time of these announcements is known in advance. These factors are called "indicators".

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It's important to understand that there is always a certain expectation of these indicators before they are announced, and currency traders are positioned in the forex market accordingly. If the announcement shows the indicator to be much as expected, there will be little or no movement in the currency.

However, if the indicator is in any way markedly different from expected, that's when you'll see currency price movements. This is the basis of forex fundamental analysis, and many traders rely on it exclusively. (This is probably not wise, however, and a combination of fundamental and forex technical analysis is a better basis for forex trading.)

The most influential of the central banks are the U.S. FED, the European Union's ECB, Japan's BOJ and the U.K. BOE. As the saying goes, when they speak, people listen --- and also trade!

As might be expected, U.S. indicators have the biggest impact on the forex market. The ECB indicators have less impact, except when they are much different from what was  expected. When you read the business and financial press, pay attention to senior bank officers talking about interest rates or inflation, as these are seen as the two major economic drivers.

Just to add to the complexity of forex fundamental analysis, accurately measuring the relationships among the variables is difficult. Much of the process depends on estimates based on historical experience. On the opposite side, assumptions are often made on the basis of what's happening in world news, such as wars, inflation, major political changes, etc. These may or may not come about as anticipated, but it can take time for the markets to adjust to the reality.

There's nothing more fundamental than supply and demand, and that certainly holds true in the forex market. If other factors have caused the supply of a currency to decrease but the demand remains at the same level, the price will increase. If the supply increases while the demand stays constant, the price will decrease.

This is the basis of forex fundamental analysis.

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