Fundamental Analysis In The Forex Market Is Anything But Dead
For many years the mainstay of analysis in foreign currency trading was fundamental analysis however in the last few years this has been increasingly replaced by technical analysis. So, is forex fundamental analysis dead?
Fundamental analysis is basically an examination of political and economic events that may affect currency prices and these events are reflected in such things as a country's published economic policy, growth rates, inflation and employment rates. So, by looking at 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 currency prices today.
Like any other market the foreign currency market is affected by supply and demand which are themselves influenced by general economic conditions. In particular, supply and demand are affected by the strength of the economy (as seen in its gross domestic product, foreign investment and trade balance) as well as by interest rates.
For foreign currency traders fundamental analysis means looking at current economic conditions which are reflected in the many indicators like producer price indexes, consumer price indexes, durable goods orders and retail sales which governments release on a regular basis.
One important indicator for foreign currency traders are interest rates because movements in interest rates can both strengthening and weakening currencies. For instance, whilst high interest rates may cause stock market investors to sell in the belief that high interest rates will lead to higher company borrowing costs hitting their share price, these same high interest rates might also strengthen the currency so that it is an attractive currency to trade.
Another important set of indicators for the foreign currency trader are international trade indicators. If a country is showing a deficit on its trade balance it is normally seen as an bad sign as money leaving the country to pay for imported goods could well devalue the currency. For the currency trader however fundamental analysis might well show that market expectations mean that a trade deficit in certain circumstances is not at all bad. For instance, many countries often operate with a trade deficit and so unless there is an unusual rise in the deficit then the currency will already reflect this fact.
There are currently about twenty-eight main indicators in the United States that foreign currency traders rely on to make their trading decisions as these indicators have a significant 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 major influence on their own markets. Foreign currency traders need therefore to familiarize themselves with these indicators and have at least a working knowledge of exactly how they affect currencies.
Fundamental analysis is far from easy and requires traders to work with large quantities of data which often require quite extensive analysis. Nowadays however the arrival of powerful personal computers and fast access to the Internet mean that currency traders can now not only easily access the data which they need to perform fundamental analysis but also have access to some very powerful programs with which to analyze that data at the click of a mouse.
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