It is usually said that information is the secret to profitable Forex trading but, though correct and timely information is indeed vital for currency trading, it is the examination of this information that is the real key. There are two main forms of analysis used in currency trading ? technical and fundamental analysis - and here we look at precisely what is meant by fundamental analysis.



At its simplest, fundamental analysis examines both economic and political conditions that could affect currency prices and Forex traders who use fundamental analysis rely on news reports for information about a range of things including economic policy, growth rates, inflation and employment rates.

In essence, fundamental analysis gives an outline of currency movements and a broad view of economic conditions which could well affect the value of a specific currency. With this view to hand, foreign currency traders will then frequently go on to use technical analysis to then plot entry and exit points into the market and to add to the information gained from fundamental analysis.

The foreign exchange market is much like other markets and is affected by the laws of supply and demand, which are themselves affected by economic conditions. Two of the most important economic factors that affect supply and demand are the strength of the economy and interest rates and the strength of the economy is itself affected by the gross domestic product (GDP), foreign investment and the economy's trade balance.

A variety of economic indicators are published by governments and other sources and are normally held to be sound measures of the health of an economy that are followed by all sectors of the investment market. Most economic indicators are published once a month although a few are released more often and usually weekly.

Two of the main fundamental indicators are international trade figures and interest rates, but other especially useful indicators include the producer price index (PPI), consumer price index (CPI), purchasing manager's index (PMI), durable goods orders and retail sales.

Interest rates are a very important indictor because they can have a weakening or strengthening affect on a currency. For example, high interest rates could attract foreign investment which strengthens the local currency, while investors in the stock market usually react to rises in interest rates by selling in the belief that the higher cost of borrowing will have a bad affect on many companies. Large-scale selling by stock investors can quite often result in a downturn in both the stock market and the national economy.

Indicators of international trade are also extremely important for the foreign exchange trader. A trade deficit, indicating that exports levels are below those for imports, is usually seen to be an adverse indicator as money leaving the country to purchase goods from overseas could well have the affect of devaluing the currency. However, fundamental analysis will also point up market expectations and these will often determine whether or not a trade deficit is unfavorable. For example, it could be the case that a county usually operates on a trade deficit and that this has already been factored into the price of its currency. In general terms, trade deficits will only affect currency prices where they are above the level that the market would normally expect to see.

Every country will have its own set of economic indicators (at this time there are some twenty-eight major indicators in use within the United States) and these strongly influence the financial markets. For this reason, Forex traders need to be aware of them and examine them with great care when they are preparing their trading strategies.

Fortunately, for traders working on the Internet, many websites today carry a wealth of the latest information, but it is up to individual foreign exchange traders to extract this information and then apply fundamental analysis to it in order to formulate their trading decisions.