Fundamental analysis is basically a case of examining the political and economic events that may affect currency prices and these events are reflected in things like a country's published economic policy, inflation, growth rates and rates of unemployment. So, by understanding the historic effects of political and economic events on the value of a country's currency it is possible to predict the effect that present events will have upon currency prices today.



As with other markets the currency market is affected by supply and demand which are themselves influenced by general economic conditions. In particular, supply and demand will be affected by an economy's strength (as seen in its gross domestic product, foreign investment and trade balance) as well as by interest rates.

For the forex trader fundamental analysis means looking at current economic conditions which are reflected in the many indicators such as producer price indexes, consumer price indexes, durable goods orders and retail sales which governments release periodically.

One central indicator for currency traders are interest rates as movements in interest rates can both strengthening and weakening a currency. For instance, while high interest rates can trigger stock market investors to sell in the belief that increasing interest rates will also mean higher borrowing costs for companies hitting their share price, these same high interest rates may also strengthen the local currency making it an attractive currency to trade.

Another central set of indicators for the currency trader are international trade indicators. If a country shows a deficit on its trade balance it is generally seen as an unfavorable sign as money leaving the country to pay for imported goods and services may well devalue the currency. For the forex trader however fundamental analysis might well show that market expectations mean that in some circumstances a trade deficit is not at all bad. For instance, many countries frequently operate with a trade deficit and so unless there is an exceptional increase in this deficit then the currency will already reflect this fact.

There are presently approximately twenty-eight main indicators in the United States that traders use to make their trading decisions because all of these indicators have a significant influence on the financial markets. At the same time other countries around the globe with well traded currencies also produce similar sets of indicators that once again have a major influence on their own markets. Foreign currency traders must therefore be familiar with these indicators and need to have at least a rudimentary knowledge of just how they influence currencies.

Fundamental analysis is far from easy and requires currency traders to deal with huge quantities of data which often require some quite extensive analysis. These days however the advent of high-powered personal computers and broadband access to the Internet mean that currency traders can now not only quickly access the data that they need to carry out fundamental analysis but also have access to some extremely powerful programs which will analyze that data for them at the click of a mouse.