Forex Fundamental Analysis Is Certainly Not Dead And Buried

For very many years the basis of analysis in the currency markets was fundamental analysis but in the past few years this has been increasingly replaced by technical analysis. So, is forex fundamental analysis dead?

Fundamental analysis is in essence a case of examining the political and economic events which may affect currency prices and these events filter through into such things as a country's published economic policy, growth rates, inflation and employment figures. Thus, by looking at the historic effects of political and economic events on the value of a country's currency traders are able to predict the effect which current events will have upon the currency today.

Like any other market the foreign currency market is affected by supply and demand which are themselves influenced by economic conditions. In particular, supply and demand are affected by the strength of the economy (reflected in its gross domestic product, foreign investment and trade balance) and also by interest rates.

For currency traders fundamental analysis means examining current economic conditions which are reflected in the many indicators like producer price indexes, consumer price indexes, retail sales and durable goods orders which governments release periodically.

One important indicator for foreign currency traders are interest rates as changes in interest rates can both strengthening and weakening currencies. For example, while high interest rates can trigger stock market investors to sell in the belief that high interest rates will also lead to higher company borrowing costs hitting their share price, these same high interest rates could also strengthen the currency making it an attractive currency to trade in.

Another important set of indicators for the foreign currency trader are international trade indicators. When a country is showing a deficit on its trade balance this is normally seen as an unfavorable sign as money flowing out of the country to pay for foreign goods and services may well devalue the currency. For the foreign currency trader however fundamental analysis might well show that market expectations mean that in some circumstances a trade deficit is not at all bad. For example, some countries often operate with a trade deficit and so unless there is an abnormal rise in this deficit the currency will already reflect this fact.

There are currently some twenty-eight main indicators in the US which forex traders rely on to make their trading decisions because all of 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 produce similar sets of indicators which once again have a major influence on their own markets. Foreign currency traders need therefore to be familiar with these indicators and have at least a working knowledge of just how they influence currencies.

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

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