Fundamental Analysis and Trading the Forex Market Using Fundamentals

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Forex traders mostly trade the forex market either through fundamental or technical analysis. In a number of instances, the traders make use of combined analysis method. The fundamental analysis involves the use of essential economic factors to form an outlook of what the exchange rate of a currency pair would be in the future. This article discusses the most basic economic indicators used by forex trader to monitor the forex market.

The primary factors forex traders consider while trading with fundamental analysis.

The fundamental factors considered by forex traders while trading forex include economic news events, national political factors, foreign geopolitical upshots and also natural disasters. These factors together with a country’s economic factors affect the exchange rate of a currency pair.

Fundamental Analysis and Trading the Forex Market Using Fundamentals

Nevertheless, the state of the economy is normally what is used to measure the exchange rate of a currency in the long-run. The fundamental indicators that are commonly monitored closely in the forex market that determine the value of a currency include the following:

  1. The country’s GDP or Gross Domestic Product

The GDP of a country is the measure of the economic activities in a country and the calculation of the amount of the country’s entire public and private spending, business and government expenditure, amount of money invested in the country together with net exports.


  1. The rate of Unemployment

The rate of employment in a country can be used to determine how healthy the economy is and the spending capacity of its citizens.


  1. Inflation Rates

The high cost of goods in a country have an effect on the country’s exchange rate after a long time and can, therefore, have an effect on the exchange rate of that country.


  1. Interest Rates and differences in the interest rate of the currency pair

The difference between the exchange rates of two currencies plays a significant part in the determination of the exchange rate of a currency over the other. It is a major factor that is used to determine the value of one currency against the other. It also has a significant impact on the country’s investment.


  1. The capital flows in a country with Net Imports/Exports

The net capital flow between one country and the other will have a direct effect on the relative value of the currencies of the two countries. What this means is that when a country imports exceed the exports of the country, the value of the country’s currency will depreciate give the fact that importers need to sell their currency to buy foreign goods. The rate of foreign investment in a country as well plays a significant role in the supply/demand stability, and thus has strong effects on the country’s currency valuation.


  1. Money Supply of a country

The way a country controls its supply of the local currency helps to determine the value of the currency in relation to the other given the fact that the supply of a country’s money has a direct influence on the inflation and interest rates in the country. When the supply of money is high, the inflation is equally high and the interest rate is low.


  1. Economic estimation factors

The rate of production in a country together with the spending habits of the citizens of the country has an influence on the inflation and interest rates. Thus, they are important factors that also determine the currency valuation.


  1. Prospective economic prospects

The economic future of a country compared to other world economies have to effect on the value of the country’s currency. It also determines the trade volume of the country both locally and internationally.


Currency Valuation Theories

There are a lot of different economic theories that are employed while evaluating the exchange rate of currencies. Both economists and forex traders make use of these theories to understand the forex market and make a forecast about the future value of a currency pair.


These economic theories include:

  • Forces of demand and Supply
  • Purchasing Power Parity or PPP
  • Interest Rate Parity
  • Balance of Payments


How to use Fundamental Analysis

The use of fundamental analysis commonly includes forming a general opinion based on the economic indicators we described in this article. Ultimately, these indictors can be positive or negative depending on the particular currency and time. To trade forex, you can try to match currencies with the positive or negative overview based on the economic indicators and economic theories that we have described here.


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