Once you join the forex market, it's like you are joining a worldwide market where currencies are the products that are competing against each other in their respective countries’ economies. This is when fundamental analysis becomes your best friend when it comes to figuring out what is driving the market and helping you to do the right thing in terms of trading.

What is Fundamental Analysis

Fundamental Analysis is the application of analysing macroeconomic indicators, government policies and economic data whilst considering the true value of a currency. Unlike the stock market, when you trade currency, one of the key factors you need to be aware of is the cost of a country’s debt and the nation’s current political situation, not just the earning potential of a company.

Or think of it this way: In the same way you would base decisions on a company’s profit margins and prospects — and not just on a quick jump in its stock price — you would look at a country’s economic fundamentals to place a value on a currency. Strong employment in a healthy economy, controlled inflation, and sound governance are the usual drivers of a firm currency.

Fundamental vs. Technical Analysis

Whereas technical analysis concentrates on price patterns and chart indicators to predict a currency pair’s future price movements, fundamental analysis is based on a currency’s strength or weakness and potential directions in the future. Technical analysis may tell you when to enter the trade, but fundamental analysis tells you why a currency should move in that direction.

For sustainable growth and profitability in forex trading, you must get a good foundation. Think, for instance, of a scenario where the FOMC warned it would increase interest rates in 2022: fundamental analysis would have opened the door for traders to expect the USD to appreciate against other currencies, and it did the job over months, offering many trading opportunities to those who understood the economic characteristics behind this.

Basic Terminologies: The 5 Core Pillars of Fundamental Analysis

To comprehend the concept of fundamental analysis, you must master five key economic indicators upon which currency value is based. Think of them as the vital signs of a country’s economic health.

Gross Domestic Product (GDP) is the sum of everything produced within a country. It is the broadest measure of current economic activity and the best indicator of the economy’s current position in the business cycle. Rising GDP figures indicate a prosperous economy that stimulates foreign investment and strengthens a country’s currency.

Conclusion

There is an old investing adage that says Learn to 'atomise' fundamental analysis is your first step to understanding the 'why' of the forex market moves. Technical analysis can let you know when to get into a trade, but fundamental analysis tells you the “why” to a currencyÂ’s future value or lack thereof.

In our guide, we’ve discussed how economic indicators such as GDP, employment figures, inflation, and central bank actions lay the groundwork for currency movements. We’ve observed how those elements all come together in different market cycles and how successful traders create systematic mechanisms to analyse and trade off of fundamental information.

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