Fundamental analysis is a method of the price movements predicting in the Forex market by assessing the economic and political events that may affect the of supply and demand for a specific asset. The political and economic situation analysis gives a clear idea of in what side the course to a particular currency will move in the near future. However, to correctly interpret the news, you must have some experience. Therefore, newcomers don’t use fundamental analysis and focus more on the technical methods.
The difficulty of fundamental analysis
The difficulty of fundamental analysis is that it is necessary to consider a huge number of factors affecting the supply and demand of the asset. In other words, you have to look at the situation in general, assessing how the state of the economy change at some point. If the prospects for country’s economic development is good, its currency will strengthen due to foreign investment. If the country is in crisis, you shouldn’t count on the rate increase, because the Government will be forced to buy foreign currency to support the economy.
Factors of fundamental analysis
Such factors as the unemployment level, Central Bank’s interest rate, Government’s monetary policy, relations with the main trade partners, etc. influence on the economy state. In addition, a trader using fundamental analysis needs to know the basic features of the country.
For example, Canada is one of the world’s oil exporters. This industry is based its economy. Thus, if world oil prices rise, the Canadian dollar is increasing.
If we consider Switzerland, its national currency is the strongest in times of global crises. In such times, the capital from all over the world flock to Swiss banks, thereby strengthening the Swiss franc.
A discount rate of the country’s Central Bank has the particular importance to the national currency rate.
For example, suppose the United States economy improves and the U.S. dollar gains strength. In such situation, the Government may decide to raise the interest rates.
Higher interest rates make the dollar more attractive to investors. As a result, wanting to buy the American currency will be more. Therefore, the demand for US dollar will increase and its rate will rise too.
All that you need to consider when you forecast using fundamental analysis. If you learn to correctly assess the degree of the economic and political events influence on exchange rates, you will be able to achieve very good results in Forex trading.