What is Forex Fundamental Analysis?

WHAT IS FUNDAMENTAL ANALYSIS

Forex fundamental analysis involves looking at the social, political and economic factors that may affect the forex market’s supply and demand.

This blog will go into detail on what forex fundamental analysis involves, and the different types of fundamental analysis. Read on to find out more!

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Forex fundamental analysis: the basics

Forex fundamental analysis involves looking at the social, political and economic factors that may affect the forex market’s supply and demand.

Put simply, if a country’s economy looks good, the value of their currency is likely to increase as other countries are likely to increase business with them, furthering demand for their currency. The opposite is also true: if a country’s economy looks unstable, the value of their currency is likely to decrease.


How would you use forex fundamental analysis in trading?

So - how would you use fundamental analysis while deciding whether to make a trade?

If you were looking to purchase shares in an airline company, you might look at factors such as the price of oil, tourism statistics and the political climate of the countries the airline flies to.

These all have the potential to impact the value of the shares: for example, if the country is in a state of political unrest, this may discourage travel there - or if the price of oil increases, this will increase the cost of flying for the airline, potentially driving ticket prices up and thereby discouraging travel.


Types of fundamental analysis

Fundamental analysis, then, is about assessing all of the factors that impact the way a country’s currency is valued - from the economic to the political.

Types of fundamental analysis: economic

There are a range of economic factors to fundamental analysis, such as:

Consumer Price Index (CPI)

The CPI measures changes in the prices of consumer goods across over 200 different categories. So - how can you use this? The price of a country’s exports in particular can be a great indicator of a currency’s strength or weakness.

Gross Domestic Product (GDP)

Changes in GDP can also affect a country’s currency. For example, an increase in GDP indicates economic strength that could spark increased value in its currency, especially if the market anticipates a possible interest rate hike.

Producer Price Index (PPI)

PPI is the price index that measures the changes in prices received by domestic producers for the goods they manufacture. This affects a country’s currency - a higher PPI number suggests higher future consumer inflation, while a lower number indicates lower future inflation.

Types of fundamental analysis: social

The most common social factor indicating a country’s economic strength is unemployment.

Unemployment rates

A country’s unemployment rate is considered a lagging indicator, which means it changes only after the economic conditions of a country have changed. So - how can you use this to analyse a country’s economic strength? Put simply, higher unemployment rates weaken currencies. Unemployment rates can provide traders with information about future interest rates, and can cause some market volatility.

Types of fundamental analysis: political

There are a range of political factors that may affect the value of a country’s currency:

Elections/referendums

A country’s political climate can greatly affect its economy. For example, if a new elected government favours capital incentives and lower interest rates, the value of that country’s currency may be negatively affected.


What’s the difference between fundamental analysis and technical analysis?

Both fundamental and technical analysis are used to predict trends in the market, but there are differences between them. For more information on the difference between the two, read our page on Forex Fundamental Analysis vs Technical Analysis.


What are Elliott Waves and how can you incorporate them into your trading strategy? Find out everything you need to know about technical analysis next…

Read What is Technical Analysis? ⟶

October 23, 2019