In the equities market, fundamental analysis looks to measure a company's true value and to base investments upon this type of calculation. To some extent, the same is done in the retail forex market, where forex fundamental traders evaluate currencies, and their countries, like companies and use economic announcements to gain an idea of the currency's true value. All of the news reports, economic data and political events that come out about a country are similar to news that comes out about a stock in that it is used by investors to gain an idea of value.
Since currencies are the basic building blocks of all economic activity, all the developments in all the various sectors of an economy have implications for currency market trends. While this abundance of data may appear to complicate the task of the beginner, in fact, all the fundamental factors that influence the global economy are closely interrelated, and it’s quite possible to trace a path from the most general and basic concepts, such as interest rates on mortgages to the most complicated ones, such as the balance of payments and industrial production of nations.
Fundamental analysis involves studying the economy of a country to determine the effect this has on the value of its currency. Understanding the relationship between an economy and its currency value can allow a trader to determine the demand and a likely increase/decrease in value for a particular currency. There are certain economic indicators or reports that forex traders can observe in order to determine the strength of an economy. These reports are released by governments and independent bodies at set times and can be released weekly, monthly, quarterly or annually, depending on the report.
Monitoring the country’s economic reports as indicators such as the GDP, CPI, employment change, and retail sales give a comparative view of conditions from one period to the next. These reports are readily available online and are simultaneously updated on economic calendars. Several market participants watch out for the release of these figures since it may trigger huge moves in the forex market. Social conditions such as war or unrest also influence a country’s fundamentals. These conflicts may lead to shop closures, widespread protests, and a standstill in economic activity which may lead to weaker business conditions and consumer spending, translating to lower growth and lack of appetite for its currency.
There are many economic indicators, and even more private reports, that can be used to evaluate forex fundamentals. It is important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy. When properly used, these indicators can be an invaluable resource for any currency trader. The most important thing that should be taken away from this section is that currencies and countries, like companies, are constantly changing in value based on fundamental factors such as economic growth and interest rates.
