Today in this article we are going to discuss what a fundamental analysis on forex looks like. You will gain insight and learn how to use the fundamental analysis on Forex the right way.
What does a fundamental analysis on Forex looks like?
A fundamental analysis on forex is a analysis that focus on the development of the economy of a country to trade currency more effectively. In a forex fundamental analysis you will get to know what the economy situation is of a country, what policies or plans of the government are, speeches of big politicians, economic events and plans & statement of central. All these factors can influence the value of a currency big time.
What are the key factors to look at the fundamental analysis on Forex?
#Key Factor 1
The first key factor in the fundamental analysis on forex is the interest rate. The interest rate is one of the key factor that has a lot of influence on the value of a currency pair. For example when the central bank of a certain country increase the interest rate the value of the currency of that country will go up. The reason for that is that foreign investor can get a higher return if they invest in that country assets or expand their business there. When a central bank is weakening the interest rate then the value of a currency will go down. One of the reason for that is the investor get lesser profit from his investment as the asset of the country goes down in value.
#Key Factor 2
The second key factor in the fundamental analysis on forex is the employment rate. If the unemployment rate is low it means that there are a lot of people who is working. But it also means that there are lesser people available for work. So if a company needs a employee, the company will need to offer a higher salary to beat the competition. As a result of this the salaries will increase and therefore the pricing for the goods will go up. When the prices of good are increasing it means that the inflation is increasing. If the inflation rate is too high the central bank will have to step in. The central bank will increase the interest rate to keep the inflation rate under control. As you may know when a central bank increase their interest rate the value of a currency will increase.
#Key Factor 3
The third key factor in the fundamental analysis on forex is the economic data of a country. There is a wide range of economic indicators that provides economic data of a country. The most important economic indicators are: the GDP growth, Consumer confidence index, manufacture index, service index, inflation rate index, price index , jobs growth index and the investor confidence index. The best way to get these data is to check the economic calendar of investing.com. When you look at the their economic calendar you will see on which date the economic data will be released from which country. And you will see what the forecast are from experts. You will also see the symbols of bulls. The more bulls there are the more impact that economic data will have on the markets. Usually when the economic data is way below the forecast of the experts, the markets will go extremely bearish. And when the economic data is way above the forecast of the experts, the markets will go extremely bullish.
#Key Factor 4
The fourth and the last important factor in the fundamental analysis on forex is the policies and statements from the central banks and important politicians. The policies and statements from the central banks and governments have a huge impact on the value of currencies. The reason for that is both parties are responsible for the economic health of their country. When the economy is going bad both the government and the central bank have too come up with new policies to get the economy back on his track. In the anticipation of central bank or government economic help the value of a currency will either go up in value or go down in value. As a trader you can make a lot of money in this situation.
Let’s say the Federal Reserve (American central bank) is increasing his interest rate while the BoA (central bank of Britain) does nothing. In this scenario the USD will go up in value while the GBP will down in value. If you were expecting that the GBP was going bearish against the dollar, then the best way to make money was by going short on the GBP/USD. And if you were expecting that the USD was going up in the value then the best way to make money was to buy USD/GBP.
How to use the fundamental analysis on forex for trading
In my experience the best way to use fundamental analysis on forex trading is too used it with technical analysis as well. To increase the chance of trading successfully you must understand what the are causes that can cause a change in the price of a currency. In my eyes the fundamental analysis on forex provides me the best understanding of why a price change might happen. And the technical analysis provides me the insight if that news or expectation of a cause is already priced in the markets or not. In other words I use the fundamental analysis on forex for reasons to buy or sell and I use the technical analyses for which price I would buy or to sell.