Fundamental analysis is the valuation of an asset based on financial and economic conditions. In the stock market, financial statements of listed companies are used to find the intrinsic value of the company.
But, in the case of the Forex market, there is no financial statement of a country.
This is why fundamental analysis is different in the case of forex trading. In forex trading, economic indicators are used to measure and compare the economic condition of currency pairs.
In the Forex market, fundamental analysis focuses on the overall condition of the economy, interest rates, production, earnings etc. It includes the study of how global economic news and other major news events affect the forex market.
Like other financial markets, the Forex market is driven by supply and demand. This supply and demand changes continuously due to any news event, social force, economic announcement, federal policy change, company earnings and news.
When the economic condition of a country is strong, the demand for the currency of that country increases naturally. This strong economic condition pushes up the value of the currency against other currencies. For example, if the economy of Australia becomes stronger than the value of AUD will increase relative to other currencies.
Objectives of Fundamental Analysis:
- To conduct the valuation of currencies.
- To predict the future value of currencies
- To measure the strength and weakness of currencies
- To calculate the risk factors
- To compare the economic condition between two countries and their currencies
- To determine the supply and demand of a currency.
Economists made the economic calendar where they forecast different economics figures and values according to previous months. It consists of economic data which is sorted by date, time, currency, data released, actual, forecast, previous etc.
This economic calendar helps traders to get the forecasted economic data. This forecasted economic data helps traders to take positions before the news event.
Economy reflects in the long term trends. Major Price movements are due to economic changes. Traders can predict the future possible trend by using fundamentals.
Use of fundamental analysis can be very useful in case of long term trading or invest.
Originally published at Introduction to Fundamental Analysis in Forex