FOREX Fundamental Analysis Explained

Using Forex fundamental analysis is one of the most common methods of analyzing the market. This method differs greatly from technical analysis in the Forex market. Here are the basics of Forex fundamental analysis and how it works.

Fundamental vs Technical

Fundamental analysis deals with the underlying reasons that the price of a currency pair will change. You will essentially examine the country that is represented by a specific currency. If the economy of that country looks good, you are going to say that the value of their currency is going to increase faster than other countries. With a technical analysis, you are instead looking at price charts of the currencies. You believe that prices move in a specific pattern and that you can predict this pattern. You will use indicators on your trading platform and many different strategies in an effort to predict the movement of the price.

Interest Rates

The most important factor that is involved in fundamental analysis is the interest rate that is available in the market. Interest rates directly impact the amount of inflation that is present in a currency. If interest rates are increased, the amount of inflation in the currency decreases. If interest rates are lowered, inflation is increasing. Traditionally, the announcements of the Federal Reserve have a large impact on the Forex market because the Fed is in charge of handling this issue.

Non-Farm Payroll

Another economic indicator that many people look at when trading Forex is non-farm payroll. This is a statistic that is released that tells you how much payroll was issued in the country for positions that do not involve agricultural industries. This is a good indicator of the strength of a country's economy. This statistic is released on the first Friday of every month. If you are trading the market, you will want to be very cautious about trading whenever this news announcement is released.

Housing Data

Forex traders will also look at recent housing data from a particular country when analyzing the economy. Housing information can be a good barometer of the economy of a country. If housing data looks good, you can reason that the value of the currency is going to increase as well. Housing data is regularly released in the form of a news announcement. You will be able to find out how many new houses have been built and how many existing homes have sold or are under contract.

Comparing Countries

When you are using fundamental analysis in the Forex market, you are going to have to look at multiple countries. Every Forex transaction involves buying one currency and selling another. Therefore, you are going to have to be able to compare one country against the next. Just because one country looks like it has a strong economy, that does not mean that the other country in the currency pair is not strong as well. Take everything into consideration before you place any trade when using fundamental analysis.