Forex Fundamental Analysis Is Certainly Not Dead And Buried

 

Forex Fundamental Analysis Is Certainly Not Dead And Buried

For many years the foundation of analysis in forex trading was fundamental analysis however in the last few years this has been replaced to a large extent by technical analysis. So, is fundamental analysis for foreign currency trading trading dead?

Fundamental analysis is in essence an examination of economic and political events that might affect currency prices and these events filter through into such things as a country's published economic policy, growth rates, inflation and rates of unemployment. So, by studying the historic effects of economic and political events on the value of a country's currency it is possible to predict the effect that present events will have upon the currency today.

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

For forex traders fundamental analysis involves examining current economic conditions which can be seen through the many indicators like consumer price indexes, producer price indexes, durable goods orders and retail sales which governments release regularly.

One central indicator for foreign currency traders are interest rates because movements in interest rates can both strengthening and weakening currencies. 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, those same high interest rates may also strengthen the currency making it an attractive currency to trade in.

Another central set of indicators for the foreign currency trader are international trade indicators. Whenever a country shows a deficit on its balance of trade this is usually seen as an bad sign as money leaving the country to pay for imported goods and services could well devalue the currency. For the currency trader however fundamental analysis might well indicate that market expectations mean that in certain circumstances a trade deficit is not at all unfavorable. For instance, many countries frequently operate with a trade deficit and so unless there is an unusual rise in the deficit the currency will already reflect this fact.

There are currently about twenty-eight major indicators in the United States that forex traders rely on to make their trading decisions because all of these indicators have a significant influence on the behavior of the financial markets. At the same time other countries around the world with well traded currencies also publish similar sets of indicators that again have a significant influence on their own markets. Foreign currency traders need therefore to be familiar with these indicators and need to have at least a working knowledge of exactly how they affect currencies.

Fundamental analysis is far from simple and requires currency traders to work with massive quantities of data which often require quite extensive analysis. Today however the advent of powerful personal computers and broadband Internet access mean that foreign currency traders can now not only easily access the data which they need to carry out fundamental analysis but also have access to a number of extremely powerful programs with which to analyze the data at the click of a mouse.