Fundamental Analysis In The Forex Market Is Far From Dead

By: Donald Saunders
Submitted: 2008-05-26 12:44:20
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For many years the core of analysis in the currency markets was fundamental analysis however in the past few years this has been increasingly replaced by technical analysis. So, is forex fundamental analysis dead?

Fundamental analysis is in essence an examination of economic and political events that could affect currency prices and these events filter through into things like a country's published economic policy, inflation, growth rates and rates of unemployment. So, by looking at the historic effects of economic and political events on a country's currency it is possible to predict the effect that current events will have upon currency prices today.

Just like other markets the forex market is affected by both supply and demand which are in themselves influenced by general economic conditions. In particular, both supply and demand are affected by an economy's strength (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 many indicators like producer price indexes, consumer price indexes, retail sales and durable goods orders which governments publish periodically.

One main indicator for forex traders are interest rates because movements in interest rates can both strengthening and weakening a currency. For example, whilst high interest rates can cause stock market investors to sell in the belief that increasing interest rates will lead to higher company borrowing costs hitting the price of their shares, these same high interest rates may also strengthen the local currency making it an attractive currency to trade in.

Another main set of indicators for the forex trader are international trade indicators. Whenever a country shows a deficit on its balance of trade it is usually seen as an bad sign as money flowing out of the country to pay for foreign goods could well devalue the currency. For the forex trader however fundamental analysis may well indicate that market expectations mean that in certain circumstances a trade deficit is not at all bad. For example, many countries often operate with a trade deficit and so unless there is an abnormal increase in this deficit then the currency already reflects this fact.

There are presently approximately twenty-eight major indicators in the United States that foreign currency traders rely on to make their trading decisions because these indicators have a strong influence on the financial markets. At the same time countries around the globe with frequently traded currencies also produce similar sets of indicators that once again have a major influence on their own markets. Forex traders need therefore to familiarize themselves with these indicators and need to have at least a basic understanding of just how they influence currencies.

Fundamental analysis is not easy and requires traders to deal with huge amounts of information which often require quite extensive analysis. Nowadays however the arrival of powerful personal computers and fast Internet access mean that foreign currency traders can now not only easily access the data that they need to perform fundamental analysis but also have access to a number of extremely powerful programs which will analyze that data for them at the click of a mouse.

Article source: Expert Articles