Fundamental Analysis In The Forex Market Is Anything But Dead And Buried
by: webmark
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For very many years the core of analysis in foreign currency trading was fundamental analysis but in the past few years this has been replaced to a large extent by technical analysis. So, is fundamental analysis for forex trading dead?
Fundamental analysis is based upon a case of examining the political and economic events that might affect currency prices and these events are reflected in such things as a country's published economic policy, growth rates, inflation and employment rates. Thus, by understanding the historic effects of political and economic events on a country's currency traders are able to predict the effect that present events will have upon the currency today.
Like any other market the currency market is affected by supply and demand which are in themselves influenced by general economic conditions. Above all, supply and demand will be affected by the strength of the economy (reflected in its foreign investments, gross domestic product and balance of trade) as well as by interest rates.
For forex traders fundamental analysis means examining current economic conditions which are reflected in the many indicators like consumer price indexes, producer price indexes, durable goods orders and retail sales which governments release regularly.
One central indicator for currency traders are interest rates because changes in interest rates can both weaken and strengthen currencies. For example, while high interest rates can trigger stock market investors to sell in the belief that increasing interest rates will lead to higher company borrowing costs hitting the price of their shares, those same high interest rates could 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 balance of trade it is usually seen as an bad sign as money leaving the country to pay for imported goods may well devalue the currency. For the foreign 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 example, many countries often operate with a trade deficit and so unless there is an exceptional increase in the deficit the currency will already reflect this fact.
There are currently some twenty-eight main indicators in the US that foreign currency traders use 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 countries around the globe with frequently traded currencies also produce similar sets of indicators that again have a significant influence on their own markets. Forex traders need therefore to be familiar with these indicators and need to have at least a rudimentary knowledge of just how they influence currencies.
Fundamental analysis is not simple and requires foreign currency traders to deal with huge amounts of data which often require some quite extensive analysis. These days however the arrival of high-powered personal computers and broadband access to the Internet mean that foreign currency traders can now not only quickly access the data that they need to carry out fundamental analysis but also have access to a number of extremely powerful programs which will analyze the data for them at the click of a mouse.
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