August 29, 2017, 7:10:30 PM EST
by Newsmovesmarketsforex Staff Writer
A fundamental analysis is used to forecast the prices of various foreign currencies. It is based on a number of key economic factors and indicators which determine the strength of a country’s economy. The analysis also includes various geo-political that may impact the price movement of a currency pair.
The results of an exhaustive fundamental analysis will yield an estimate of the general direction in which Forex market is likely to move in the coming days, weeks, and months. It is important to remember here that the analysis does not give us specific numbers for the exchange rates of various currencies. Instead, it helps to understand the behavior of the Forex spot market over a certain period of time.
If the fundamental analysis hints at a positive outlook for a currency pair, it would mean that the price of that pair would experience an upward movement in the future. A negative outlook signifies a declining price trend and a neutral trend predicts a roughly flat price level.
When should Forex traders use a fundamental analysis for the Forex market?
When new information about the state of a country’s economy is made known to Forex traders, they conduct a fundamental analysis to gauge its impact on various currency pairs. The analysis takes into account various factors that shape the Forex market.
A Forex trading strategy is based on the fundamental analysis of important economic data and is used to help Forex traders make beneficial trade deals in the Forex market. It also enables them to minimize the risk factors involve in executing Forex transactions.
The results produced by the Forex fundamental analysis are much more suitable for medium to long term exchange rate prediction. On the other hand, a technical analysis will only yield acceptable results for short term predictions and cannot be used for long-term forecasting.
Successful traders heavily rely on the Forex fundamental analysis to make beneficial deals and regularly employ them to assess the direction in which the market is headed. It should be remembered here that the Forex market is always in a state of dynamic flux and can change rapidly in direction every now and then.
The market’s momentum can easily reverse in a matter of minutes after an important announcement or press release is made. Information relevant to the status of the local and global economies can have a far-reaching effect on the direction in which the Forex market trends.
Key factors of fundamental analysis
A list of the key factors that are used in a fundamental analysis is given below:
- Interest rates
The interest rate set by the central bank is the most important factors in forecasting the price movement of currency pairs. A high interest rates increase the attractiveness of a country’s currency and Forex investors flock to buy it.
- GDP growth
A positive GDP growth rate signifies an increase in the total wealth of the country. This leads to the strengthening of the country’s currency and its value rises relative to other foreign currencies.
- Industrial production
A positive growth in the country’s industrial production is the sign of a robust national economy. This encourages Forex traders to invest in the country’s local currency as its value is most likely to appreciate due to the robustness of its economy.
- Consumer Price Index (CPI)
Forex investors use the Consumer Price Index (CPI) to gauge the inflationary pressures on the prices of the good and services in a country. A high CPI value tends to show that the prices of goods and services are increasing rapidly.
In this case, the central bank is most likely to lower interest rates to bring down the rate of inflation and stabilize the growth rate for the country’s economy.
- Retail sales:
A country’s retail sales figure gives an accurate picture of the health of its economy at the grassroots level. A strong retail sales figure shows that the domestic economy is in good shape and the chances are that it will have a positive growth rates in the future.
Apart from the factors mentioned above, a Forex fundamental analysis is also based on other economic data, such as the employment statistics, national debt levels, supply and demand balance, monetary policy, political conditions, commodity prices, housing prices, external trade balance, and stock market conditions.
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