Forex And Fundamental Analysis

Fundamental analysis utilizes data points such as Gross Domestic Product, trade balance, and actions by central banks to decide how a currency will perform. Fundamental analysis is essentially doing all the math and fact finding to see how the market should value a currency, then buying or selling to await the market’s movement in your direction

Fundamental Analysis Basics

It should only be expected that an economy with a trade surplus, that is selling more goods than they are buying, would go up in value. Generally, this is the case, but not the rule of law.

Monetary Policy and Fundamental Analysis

Other important factors, such as monetary policy play into the market direction. For instance, when the Federal Reserve of the United States decided to print money to fight inflation, the value of the dollar dropped. This is the result of inflation, or the increase in the money supply that ultimately drives the value of the dollar down.

Inflation and Forex

Understanding inflation is easiest when comparing it to a collectible. Let’s say you own a super rare 1909 Honus Wagner baseball card, and there are only 100 in the world. Now, the value of each of these cards is $1 million each. If someone were to stumble on 100 cards in a dumpster outside the card factory, the supply of the cards known around the world would double to 200. Because scarcity is ultimately what creates prices, the value of the cards would be cut in half. As there are twice as many cards! This is exactly how money works.

Fundamentals are a Long Term Study

Fundamental analysis is usually best used in the long term, as in the short term markets can be incredibly irrational, or move against what should be the true value. As was stated earlier in the tutorial, nearly $2 Trillion trades hands each day on the foreign exchange, so the day to day operations often overweight the greater picture.

The Short Term

That doesn’t mean that fundamental factors do not play into the changes in price in the short term, but rather it often takes a period of months for investors to factor in all the variables that would change the perceived value of a currency. For example, scientists would not decide Global Warming was a myth based on one cool day in the middle of the summer. Rather, scientists study temperature over a period of years to solidify their data.

Forex And Fundamental Analysis