• Fundamental Analysis
Fundamental analysis is the study of how global economic news and other news events affect financial markets.
Fundamental analysis encompasses any news event, social force, economic announcement, Federal policy change, company earnings and news, and perhaps the most important piece of Fundamental data applicable to the Forex market, which is a country’s interest rates and interest rate policy.
The idea behind fundamental analysis is that if a country’s current or future economic picture is strong, their currency should strengthen.
A strong economy attracts foreign investment and businesses, and this means foreigners must purchase a country’s currency to invest or start a business there. So, essentially, it all boils down to supply and demand; a country with a strong and growing economy will experience stronger demand for their currency, which will work to lessen supply and drive up the value of the currency.
For example, if the Australian economy is gaining strength, the Australian dollar will increase in value relative to other currencies. One main reason a country’s currency becomes more valuable as its economy grows and strengthens is that a country will typically raise interest rates to control growth and inflation.
Higher interest rates are attractive to foreign investors and as a result, they will need to buy Aussie dollars in order to invest in Australia, this, of course, will drive up the demand and price of the currency and lessen the supply of it.
Interest rates are the main driver in Forex markets; all of the above mentioned economic indicators are closely watched by the Federal Open Market Committee in order to gauge the overall health of the economy. The Fed can use the tools at its disposable to lower, raise, or leave interest rates unchanged, depending on the evidence it has gathered on the health of the economy. So while interest rates are the main driver of Forex price action, all of the above economic indicators are also very important.