Fundamental Analysis

This analysis considers external events, influences, financial statements, and industry trends to assess whether an asset is overvalued or undervalued.

In the context of stock trading, fundamental analysis involves examining the financial statements of individual companies, such as income statements and balance sheets. However, when applied to currency trading, the approach differs.

Fundamental analysis in Forex aims to understand market valuation changes by analyzing economic, social, and political forces that impact the supply and demand for a currency.

The underlying principle is that a positive economic outlook for a country should lead to a stronger currency.

This form of analysis involves studying economic trends and geopolitical events that could affect a currency’s price. A robust economy typically attracts foreign investment, which increases the demand for that country’s currency.

While the demand for a country’s goods and services influences its currency, investment opportunities within the country are also crucial factors.

Forex traders often make buying or selling decisions based on their expectations of exchange rate movements, which can be influenced by factors such as:
- Political instability domestically or abroad.
- Global market uncertainties, like the surge in demand for U.S. dollars during the recent Coronavirus crisis, as investors sought a safe haven.
- Interest rate differentials between countries. Higher interest rates in a country can attract foreign investors, leading to currency appreciation.
- Economic growth differences between countries. Developing nations with successful economic reforms might see their currencies appreciate as investors look for new growth opportunities.

Forex traders who use fundamental analysis keep an eye on price movements while monitoring financial news.

They follow updates on political climates, international relations, natural disasters, and other global events.

Additional fundamental factors influencing trading decisions include unemployment rates, inflation, fiscal policy changes, and trends in stocks, bonds, and money markets.

For instance, if the U.S. dollar is gaining strength due to an improving economy, higher interest rates might be necessary to control growth and inflation.

As interest rates rise, U.S. dollar-denominated assets become more attractive to investors. Consequently, the increased demand for U.S. dollars could lead to an appreciation in its value.