When talking about fundamental market analysis, both in general and in relation to Forex markets, it is very important to keep a few things in mind. Fundamental market analysis is a way to estimate the true value of a company, stock, or a currency pair. It is not a universal guide or a magical crystal ball that is supposed to predict future development with 100% accuracy. At best, it helps you estimate whether or not the investment is worth your while, and those who rely on fundamental market analysis in forex markets are called forex fundamental traders.
What is fundamental market analysis in Forex?
Technically speaking, fundamental analysis in Forex markets is no different than that of any other type of financial market; they too rely on news, events and the same types of data and other economic factors to determine just how solvent and valuable their object is. For fundamental forex market analysis, that object is a currency or a currency pair. Since the growth of an economy and finances in general are never static, in fact these things change all the time, forex fundamental traders require constant updates and fresh analysis in order to stay in touch with current affairs.
Why would anyone base their trading strategy on fundamental market analysis?
Fundamental analysis is a tool, one that has seen a broad use, versatile enough to be employed in a number of strategies. In other words, forex fundamental traders are not limited to a single strategy; they are the people who employ fundamental analysis as a basis for any number of strategies they see fit.
What they actually do is simple: they sell currencies at high interest rates while buying other currencies at low interest rates at the same time, effectively making money on the difference between interest rates. Buy low, sell high. Forex fundamental analysis can tell them which currencies to buy and which to sell, based on their general condition as well as that of the economy backing those same currencies. In addition, the high leverage of forex markets is what enables traders to really capitalize on even the most minute changes or discrepancies in interest rates.
Here is how it works: you acquire a certain amount of currency at the lowest interest level possible, convert it into a different currency with a much higher interest rate, and make money on interest alone, after the other currency is sold at a much higher price. But then again, the currency pair in question needs to remain stable before the deal is concluded, or there could be losses.
Apart from interest rates, fundamental analysis also deals with other factors, such as the employment situation (high unemployment means low activity, ergo the economy is weak, and so is the currency), budget issues (whether or not a government is forced to sell off currency in the foreseeable future), GDP (directly linked to interest rates) etc. All these factors matter when deciding which currencies to trade.
