Using Fundamental Analysis to Trade Forex

Using forex fundamental analysis to trade forex generally involves going over the economic indicators, government fiscal policies, social and political factors, and interest rates of one country relative to another. Fundamental analysis uses such information as a way of forecasting foreign exchange rate trends. While this technique commonly appeals to those traders with an education in economics, just about anyone can learn to determine what fundamental factors move the forex market.

Furthermore, since currency exchange rates represent the equilibrium balance point between supply and demand in the base currency against the counter-currency, the resulting exchange rate reflects not an absolute value, but instead the relative strength or weakness of these currencies against one another. As a result, fundamental data for each currency is required to make an attempt to predict directional movements for the currency pair.

Key Fundamental Economic Data

The release dates of key economic numbers are widely tabulated in economic calendars and can involve considerable market volatility if the actual number released differs significantly from the market’s consensus. The list below includes most of the key economic data releases that reporting agencies within the various countries provide to the market on a regular basis as indicated.

• Employment Data – Released monthly.
• Gross Domestic Product (GDP) – Released quarterly.
• Trade Balance – Released monthly.
• Retail Sales – Released monthly.
• Industrial Production – Released monthly.
• Consumer Price Index (CPI) – Released monthly.

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Other Types of Fundamental Information

In addition to the aforementioned economic data, some of the other important fundamental information commonly used by traders and economists in performing fundamental analysis might include the following:

• Differences in Interest Rates
• Supply and Demand Effects
• Political Influences
• Geopolitical Events
• Growth Rate Differentials
• Commodity Prices

Using Fundamentals to Trade Forex

When performing a fundamental analysis on a particular currency pair, forex traders will look at as many fundamental factors as possible for the countries of the currencies they wish to forecast, and they will take this data into account relative to one another. Traders do this in order to obtain a broad sense of what each country’s economic, growth and political climate is. This method is similar to how stock analysts might review data for corporations they are considering making recommendations about.

Basically, if the data looks better for the base currency’s country relative to the counter currency’s country, then that would tend to imply a rising forecast for their exchange rate. If the base currency’s country’s data comes across as weaker, then a falling forecast would tend to ensue. A neutral forecast would apply when prospects are roughly the same on balance for the two countries.

Once having made such a forecast, the fundamental trader would then position themselves in the forex market to take advantage of the forecast movements in the exchange rate. Over time, they would update this analysis as news events and data releases occur, and would adjust their trading positions accordingly.