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Fundamental Analysis In The Currency Market Is Anything But Dead

For very many years the mainstay of analysis in the currency markets was fundamental analysis however in recent years this has been increasingly replaced by technical analysis. So, is fundamental analysis for foreign currency trading trading dead?

Fundamental analysis is basically a case of examining the economic and political events that might affect currency prices and these events filter through into things like a country's published economic policy, inflation, growth rates and rates of unemployment. Thus, by looking at the historic effects of economic and political events on a country's currency traders are able to predict the effect that current events will have upon currency prices today.

As with other markets the forex market is affected by supply and demand which are themselves influenced by economic conditions. In particular, supply and demand will be affected by the strength of the economy (as seen in its foreign investments, gross domestic product and balance of trade) and also by interest rates.

For currency traders fundamental analysis involves looking at current economic conditions which can be seen through the various indicators such as consumer price indexes, producer price indexes, durable goods orders and retail sales which governments release periodically.

One key indicator for forex traders are interest rates as movements in interest rates can both weaken and strengthen currencies. For instance, while high interest rates might cause stock market investors to sell in the belief that increasing interest rates will mean higher borrowing costs for companies hitting the price of their shares, those same high interest rates may also strengthen the local currency so that it is an attractive currency to trade in.

Another key set of indicators for the forex trader are international trade indicators. If a country is showing a deficit on its balance of trade this is generally seen as an adverse sign as money leaving the country to pay for imported goods and services could well devalue the currency. For the forex trader however fundamental market analysis might well show that market expectations mean that in some circumstances a trade deficit is not at all unfavorable. For instance, some countries frequently operate with a trade deficit and so unless there is an exceptional increase in the deficit the currency already reflects this fact.

There are presently about twenty-eight major indicators in the United States that foreign currency traders look at to make their trading decisions because these indicators have a strong 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 once again have a significant influence on their own markets. Foreign currency traders must therefore familiarize themselves with these indicators and have at least a working understanding of exactly how they affect currencies.

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

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