ou already know that technical analysis is all about charts and patterns, but what does fundamental analysis stand for?
What is Fundamental analysis?
Fundamental analysis focuses on economic data and the political factors influencing supply and demand. Nowadays, it also involves the news headlines and the tweets of popular figures.
Mainly it examines the reason behind the movement of exchange rates, while the technical analysis clarifies the effects of these movements.
Analysing the forex market through the economic, social and political forces that affect currency prices, you can determine where the price could be headed.
Part of the fundamental analysis includes monitoring of macroeconomic indicators such as:
- Levels of economic growth
- Gross domestic product / GDP /
- Interest rates, inflation
- Money supply
- Foreign bank reserves
- Productivity data
Boringgggg stufffff on the horizon! zzzzzz
BUT nobody became successful by sleeping in front of the monitor!
Drink a cup of coffee and let’s continue!
In regard to political factors, they are determined by the level of trust and stability of governments and their policies.
The ultimate goal of any fundamental analysis is to create a quantitative value that you can compare with the current price.
This shows whether the currency price is overvalued or undervalued in comparison to its current price.
Let’s make it simpler.
Whether one’s country’s economy is strong or weak at the moment or in the future, influences the price of its currency on the market.
If this country’s economy is in a good shape, its currency will get stronger, because there will be more investors and foreign businesses which will invest in that country. It will result in a high level of demand for its currency in order to purchase assets.
Oppose to that if there is an increase in the unemployment rate, it will affect a country’s economy and monetary policy which ultimately lower the level of demand for its currency.
For example, let’s say your country has been gaining strength because the economy is improving.
By improving, there will be some raising interest rates, which control growth and inflation.
Higher interest rates will make your currency denominated financial assets more attractive.
Traders and investors will have to buy your currency in order to purchase increasing value assets.
This will automatically increase the demand for your currency.
As a result, its value will likely increase against other currencies with lesser demand.
If you learn how to make fundamental analysis, you will be able to explain to yourself the current movement of exchange rates and even forecast future movements.
We know it sounds complicated as much as the science for nuclear energy.
But don’t be afraid! Everything has a simple explanation.
For now, you just need to remember that the strength or weakness of one country’s economy directly influences its currency.
Let’s check the third type of analysis. It might cheer you up!