Basic Concepts of Fundamental Analysis For Forex Traders

Fundamental Analysis For Forex Traders

Fundamental Analysis For Forex Traders – Fundamental analysis is one of the most important factors in trading the forex market. Fundamental analysis does not only focus on the release of fundamental data or important economic events, but also on various aspects that affect a country’s economy including political events, financial system regulations, social influences and various aspects of life in society. In fact, fundamental analysis has more indicators than technical analysis, but in practice only a few important indicators that impact currency movements that traders need to pay attention to. This article briefly reviews the fundamental analysis points that you need to know in trading the forex market.

Macroeconomics is the basis of fundamental analysis. Knowing the current economic cycle, the policies of the government of a country in controlling the inflation rate, spurring economic growth, regulating the state budget and income, among others through tax revenues. The whole process is a series that can affect the movement of the value of one country’s money against other countries’ currencies. The global political situation also affects the fluctuations of the world’s major currencies. For example, the era of high inflation in the 1970s was the result of political events that affected the economic fundamentals of major countries, as well as hyper-inflation in Germany after the first world war.

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However, when global political conditions are relatively volatile, the economy tends to grow in line with new innovations in technology that spur high productivity (boom phase), which tends to cause bubbles (uncontrollable bubbles) and eventually causes contraction. The economic cycle greatly affects the investment climate and also the movement of currency values. When the boom phase is over, speculative and investment activity usually declines and the demand for currency also decreases.

The monetary policy of the central bank has a direct effect on the exchange rate of a country’s currency. What most forex market participants pay attention to is interest rates. If the central bank raises interest rates, the demand for that country’s currency will increase so that its exchange rate against other countries’ currencies will strengthen, otherwise if the central bank lowers interest rates. The large difference in interest rates between 2 countries tends to cause a carry trade. In determining the interest rate, the central bank usually looks at the rate of inflation and growth, by regulating the money supply.

When the economy contracts or signs of a recession, the central bank can implement quantitative easing policies to increase the money supply, as is currently happening in Japan, the United States, Britain and Switzerland. In addition, the credit rating of a country which is a reference for investor confidence is also important to note. If a trusted credit rating agency or company lowers the credit rating or bonds of a country, the market sentiment towards that country’s currency will tend to be negative.

The balance of payments includes the balance of trade, a country’s investment in another country and foreign investment in that country. The trade balance is the ratio between the country’s total exports and total imports. The trade balance is said to be in a surplus if exports are greater than imports, and it is called a deficit if the opposite happens. Although the current trade balance has less direct impact on price movements in the forex market, changes in the value of exports and imports are still important to know. Increased exports indicate an increased level of production which will affect the rate of economic growth.

information from: aroundforex.com

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