Fundamental analysis involves examining the intrinsic value of a nation’s currency based on economic news releases that reflect the strength, or weakness, of a country’s economy. Fundamental traders follow these news announcements, known as “fundamental indicators,” because they paint a picture of a currency's strength in relation to other countries.
Fundamental indicators are reports that include statistical data on things such as employment, gross domestic product (GDP), international trade, retail sales, housing, manufacturing, and interest rates. The stability, growth, or decline in any of these sectors may have an effect – direct or indirect – on the value of a country’s currency.
Central banks play a key role in the Forex market because they have the responsibility of changing the country’s “base” interest rate. A central bank has to find a fine balance when setting interest rates as it wants to maintain growth in the economy, but at the same time it has to be careful to curtail inflation. The bank’s decisions on whether to raise, cut, or hold the interest rate fuels speculation in the Forex market, where the value of a currency, or group of currencies, changes in real time.
In addition to information about a country’s economy, the value of a currency is connected to national and international political events, elections, and changes in government trade policies. The prices of sensitive commodities like oil and gasoline are an important fundamental indicator as high prices can hurt consumer spending and confidence, and curtail the activities of certain businesses and government services.
Natural disasters, terrorist attacks, and militarily actions in a sensitive region cause instability in the world and have a significant impact on the Forex market as they develop. These types of evens can be hard to predict in advance.
The ability to identify trends in macroeconomic indicators and reading central bank’s current and future actions is a valuable tool that comes from following financial news, watching the markets, and trading Forex.