Fundamental Analysis In The Foreign Currency Market Is Certainly Not Dead - By: Don Saunders

For very 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 fundamental analysis for currency trading trading dead?

Fundamental analysis is in essence a case of examining the economic and political events which might affect currency prices and these events are reflected in things like a country's published economic policy, growth rates, inflation and employment figures. Thus, by looking at the historic effects of economic and political events on the value of a country's currency it is possible to predict the effect which present events will have upon the currency today.

Like any other market 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 will be affected by the strength of the economy (reflected in its gross domestic product, foreign investment and trade balance) as well as by interest rates.

For the forex trader fundamental analysis involves looking at current economic conditions which can be seen through the many indicators such as producer price indexes, consumer price indexes, durable goods orders and retail sales which governments publish periodically.

One particularly important indicator for forex traders are interest rates because changes in interest rates can both weaken and strengthen currencies. For instance, whilst high interest rates can cause stock market investors to sell in the belief that increasing interest rates will lead to higher borrowing costs for companies hitting their share price, those same high interest rates may also strengthen the local currency making it an attractive currency to trade.

Another particularly important set of indicators for the forex trader are international trade indicators. Whenever a country shows a deficit on its trade balance it is generally seen as an poor sign as money leaving the country to pay for imported goods and services could well devalue the currency. For the foreign currency trader however fundamental market analysis may well show that market expectations mean that a trade deficit in certain circumstances is not at all unfavorable. For instance, some countries often operate with a trade deficit and so unless there is an unusual increase in this deficit the currency already reflects this fact.

In the United States there are currently approximately twenty-eight major economic indicators which foreign currency traders study to make their trading decisions as 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 publish a similar set of indicators which again have a significant influence on their own markets. Forex traders must therefore familiarize themselves with these indicators and have at least a basic understanding of just how they influence currencies.

Fundamental analysis is not easy and requires currency traders to deal with massive amounts of data which often require some quite extensive analysis. Today however the arrival of powerful personal computers and fast access to the Internet mean that forex 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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