Fundamental Analysis Forex

Fundamental analysis is one of several analysis methods (alongside technical and sentiment analysis) used to evaluate currencies in the Forex market. It’s the study of the real causes of market movements, and examines the economic, social and political factors that affect supply and demand, which is one of the main causes of price movement. But fundamental analysis in currencies differs from the one used in stock trading which most people are familiar with.    

Stock fundamental analysis is concerned with studying the financial statements and profit rates of companies to assess the strength of the company and the value of its shares. Currency fundamental analysis, on the other hand, is concerned with studying the macroeconomic factors that directly affect the performance of the currency, and the study of some economic, political and social factors that affect the economy and thus affect the movement of the currency exchange rate. 

Some of the most important factors and economic indicators that impact currency prices are:  

  • Interest Rate  
  • Inflation 
  • Gross Domestic Product 
  • Consumer Expenditure Indicators 
  • Investment Indicators 
  • Labour Market Indicators  

Before you begin preparing a fundamental analysis report, you must have a source from which to extract the necessary economic data and news. To assist you in this, we offer you a free economic calendar and newsroom on the Equiti website. In order to identify the strength and weakness of a currency, it is necessary to study a range of economic factors such as the economic indicators mentioned above, statements and speeches from central banks and economists, and any unexpected breaking news. 

How to Prepare a Fundamental Analysis Report 

1. The first step to preparing a fundamental analysis report is to study the results of the general economic performance over three months. This is done by knowing the result of the following data: 

  • GDP results (QoQ) 
  • Consumer spending results 
  • Housing sector results 
  • Industrial production results 
  • Durable goods report 
  • Trade balance and current account results 
  • New jobs, unemployment rates and working hours 
  • Economist statements 

All this data should be studied and compared with its counterparts for previous periods to form an overall picture of the performance of the economy and its improvement or decline. This will allow you to understand whether the economic situation is positive and is developing and supporting the currency’s strength or the economy is negative and is deteriorating and supporting the currency's weakness. 

2. The second step is to determine the expected direction of interest rates. 

You can predict the interest rate through the results of the first step analysis, the study of inflation indicators, and studying the statements and hints of officials about future monetary policy. 

Based on the first and second step in the analysis you can expect the future direction of the currency. However, there is a lot of risk for investors who make their buying or selling decisions immediately after the release of economic indicators due to high volatility when data is releasedTherefore, fundamental analysis should be based on an holistic view.  

Fundamental analysis is for the medium and long term investor, and gives only expectations of the trends but doesn’t provide entry levels, target setting or stop loss points. Therefore, technical analysis should be used along with fundamental analysis.  

Margined Forex and CFD trading are leveraged products and can result in losses that exceed deposits. The value of your contract can fall as well as rise, which could result in receiving back less than you originally deposited. Please ensure you understand the risks and be sure to manage your risk exposure effectively.

About the author

The author is an expert in the field of multi-asset trading.