What is Fundamental Analysis?

Whereas technical analysis is scouring charts for patterns or trends, fundamental analysis entails scouring economic data reports and news headlines.

Fundamental analysis is a method of assessing the forex market by examining the economic, social, and political elements that influence currency pricing.

When you think about it, this makes perfect sense! Supply and demand, just like in previous articles, determine price, or in our case, the currency exchange rate. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.

You must grasp why and how events such as an increase in the unemployment rate affect a country’s economy and monetary policy, which in turn affects the level of demand for its currency.

This form of analysis assumes that if a country’s present or future economic outlook is favorable, its currency should strengthen.

The better a country’s economy is in shape, the more international corporations and investors will invest there. This necessitates the purchase of that country’s currency in order to obtain those assets.

In a nutshell, the fundamental analysis is :

Assume, for example, that the US dollar has been strengthening as the US economy improves.

Raising interest rates may be necessary to manage growth and inflation as the economy improves. Higher interest rates increase the attractiveness of dollar-denominated financial assets.

To obtain these magnificent assets, traders and investors must first purchase some US dollars. This enhances the currency’s demand. As a result, the US dollar’s value will likely rise against foreign currencies with lower demand. Because currencies are always linked, their performance is measured in relation to another currency.

Later in the course, you’ll discover which economic data points tend to impact currency prices and why. To apply basic analysis, you must first grasp how economic, financial, and political news affect currency exchange rates.

This necessitates a solid grasp of macroeconomics and geopolitics.

There’s no need to be intimidated by such fancy-sounding terms. For the time being, just know that fundamental analysis is a method of analyzing potential currency swings based on the strength or weakness of a country’s economic future.