Fundamental Analysis For Forex
Every Forex trader must know that the 2 basic types of analysis, from which predictions derive, are the technical analysis and fundamental analysis. In this article we will try to understand what is the fundamental analysis and if it is mandatory for making decisions.
In Forex, the fundamental analysis examines the various reports on monetary developments in the world, the phenomena of political and economic life of both individual countries and the world community in general, and also different types of news with economic impact. The main purpose of fundamental analysis is to identify which events may have an influence on the development of the Forex market.
The fundamental analysis is one of the most complex and, at the same time, the key in the currency analysis. The exchange rate movements are defined by fundamental factors. These are the key macroeconomic indicators of the national economy, affecting the participants of the Forex and the level of exchange rates.
In other words, fundamental analysis is assessing the situation in terms of political, economic, financial and credit policies. Information on discount rates of the central banks, the economic policy of the Government, the possible changes in the political life of the country, as well as all kinds of rumors and expectations, are the most important in fundamental analysis.
Fundamental analysis includes an assessment of the following factors that affect exchange rates:
– Economic growth (gross domestic product, industrial production, etc.)
– State of the balance of trade, the degree of dependence on external sources of raw materials
– Money supply growth in the domestic market
– The rate of inflation and inflation expectations
– The level of interest rates
– The solvency of the country and confidence in the national currency on the world market
– Speculation on the currency market
– The development of other sectors of the world financial market, such as the securities market, competing with the foreign exchange market.
As mentioned, it is not easy to conduct fundamental analysis. The same factors in different conditions have unequal value on the market.
Thus, the trader’s success in conducting fundamental analysis depends on the understanding of the financial market laws and the ability to compare events that seem unrelated with each other at first sight. Also, fundamental analysis requires knowledge of the overall picture. Therefore, it often comes with index comparison for the same country in different time intervals.
Technical analysis is suitable for smaller time-frames, while fundamental analysis allows evaluating the factors that actively influence the dynamics of exchange rates for a few days to a few weeks.