Forex Fundamental Analysis Is Certainly Not Dead

For very many years the core of analysis in foreign currency trading was fundamental analysis but in recent years this has been increasingly replaced by technical analysis. So, is fundamental analysis for foreign currency trading trading dead?

Fundamental analysis is based upon a case of examining the political and economic events that might 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 political and economic events on a country's currency traders are able to predict the effect that present events will have upon the currency today.

Just like other markets the currency market is affected by both supply and demand which are themselves influenced by general economic conditions. In particular, both supply and demand will be affected by an economy's strength (as seen in its gross domestic product, foreign investment and trade balance) and also by interest rates.

For foreign currency traders fundamental analysis means looking at current economic conditions which can be seen through the many indicators like producer price indexes, consumer price indexes, durable goods orders and retail sales which governments release regularly.

One central indicator for currency traders are interest rates because changes in interest rates can both strengthening and weakening currencies. For instance, whilst high interest rates may trigger stock market investors to sell in the belief that increasing interest rates will create higher borrowing costs for companies hitting the price of their shares, these same high interest rates could also strengthen the local currency making it an attractive currency to trade in.

Another central set of indicators for the currency trader are international trade indicators. If a country shows a deficit on its trade balance it is usually seen as an adverse sign as money leaving the country to pay for imported goods could well devalue the currency. For the currency trader however fundamental analysis might well show that market expectations mean that a trade deficit in some circumstances is not at all unfavorable. For instance, some countries often operate with a trade deficit and so unless there is an abnormal increase in the deficit the currency will already reflect this fact.

In the US there are presently approximately twenty-eight major economic indicators that forex traders study to make their trading decisions because all of these indicators have a strong 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 that once again have a major influence on their own markets. Currency traders need therefore to be familiar with these indicators and have at least a basic understanding of exactly how they affect currencies.

Fundamental analysis is not simple and requires foreign currency traders to deal with massive amounts of information which often require some quite extensive analysis. Today however the advent of powerful personal computers and fast access to the Internet mean that foreign currency traders can now not only quickly access the data which they need to perform fundamental analysis but also have access to some very powerful programs which will analyze that data for them at the click of a mouse.