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Fundamental Analysis In The Forex Market Is Far From Dead

By: Donald Saunders

For very many years the mainstay of analysis in forex trading was fundamental analysis however in recent years this has been replaced to a large extent by technical analysis. So, is fundamental analysis for forex trading dead?

Fundamental analysis is based upon a case of examining the 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 employment rates. Thus, by studying the historic effects of economic and political events on the value of a country's currency traders are able to predict the effect that present events will have upon the currency today.

As with other markets the foreign currency market is affected by both supply and demand which are themselves influenced by economic conditions. Above all, both supply and demand will be affected by an economy's strength (as seen in its gross domestic product, foreign investment and trade balance) as well as by interest rates.

For foreign currency traders fundamental analysis involves examining 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 regularly.

One particularly important indicator for foreign currency traders are interest rates because movements in interest rates can both weaken and strengthen currencies. For example, whilst high interest rates might trigger stock market investors to sell in the belief that increasing interest rates will lead to higher company borrowing costs hitting their share price, those same high interest rates may also strengthen the currency so that it is an attractive currency to trade.

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

In the US there are presently about twenty-eight major economic indicators that foreign currency traders rely on to make their trading decisions as all of these indicators have a strong influence on the financial markets. At the same time other countries around the globe with well traded currencies also produce similar sets of indicators that again have a significant influence on their own markets. Currency traders need therefore to be familiar with these indicators and have at least a working understanding of just how they influence currencies.

Fundamental analysis is not easy and requires currency traders to deal with large quantities of information which often require quite extensive analysis. Nowadays however the arrival of high-powered personal computers and fast access to the Internet mean that foreign currency traders can now not only easily access the data which they need to carry out fundamental analysis but also have access to a number of very powerful programs with which to analyze that information at the click of a mouse.

Article Source: http://www.articleresourceindex.com

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