Fundamental analysis is the study of economic, social, and political factors that influence currency prices. Unlike technical analysis, which focuses on price charts and patterns, fundamental analysis looks at the bigger picture of what drives supply and demand for currencies.

Key Concepts in Fundamental Analysis

1. Economic Indicators

These are reports and statistics released by governments or institutions that reflect a country’s economic health.

• GDP (Gross Domestic Product): Measures overall economic performance.
• Inflation (CPI): Shows how fast prices are rising.
• Employment Data (e.g., NFP in the U.S.): Indicates job creation and economic strength.
• Interest Rates: Central banks use rates to control inflation and growth.

2. Central Banks & Monetary Policy

Central banks (like the Federal Reserve, ECB, or BOJ) are major players in the forex market. They influence currency values by adjusting interest rates, using quantitative easing, and making monetary policy decisions.

3. Geopolitical Events

Elections, wars, trade agreements, and natural disasters can cause sudden volatility in the forex market.

4. Market Sentiment

Even if data is positive, trader perception can impact price movement. For example, if traders expect an interest rate hike, they may buy the currency ahead of time.

How Traders Use Fundamental Analysis

• News Trading: Acting quickly on news releases (like NFP).
• Long-Term Trends: Studying economies to predict long-term currency strength.
• Combining with Technicals: Many traders use both fundamental and technical analysis for confirmation.

The Goal
Traders use fundamental analysis to decide whether a currency is overvalued or undervalued, and then place trades accordingly.

Example
If the U.S. Federal Reserve raises interest rates, the USD usually strengthens because higher rates attract more foreign investment. On the other hand, if the Eurozone reports weak economic growth, the EUR might fall.

Combining with Technicals
Many traders use a combination of fundamental analysis and technical analysis to create a comprehensive trading strategy.

Key Takeaway

Fundamental analysis helps traders understand why a currency is moving. By paying attention to economic indicators, central banks, and world events, traders can make informed decisions about when to buy or sell.