What is Fundamental Analysis?

Fundamental Analysis is the study of economic and political factors which influence currency prices and, subsequently, trading decisions.

Fundamentals that impact currency value:

  • Interest Rate Differentials
  • Growth Rate Differentials
  • Political Influence
  • Geopolitical Events
  • Commodity Prices
  • Mergers & Acquisitions

Fundamental analysis is an approach to currency valuations that looks at economic data, monetary policy (interest rates), official currency stances, geopolitical events and market psychology as the primary drivers of currency values. The basic belief in fundamental analysis is that markets are continually adjusting to new information, and that the course of future currency movements is best predicted by fundamental factors. Forex traders tend to focus on fundamentals for long-term effects on currencies.

Fundamental analysis differs from technical analysis in that fundamentalists believe prices will adjust to reflect new information coming into the market, while a purely technical approach focuses solely on price levels, patterns and other indicators derived from price data and ignores developments in the fundamental sphere.

In practice, though, traders need to be aware of what is happening from both perspectives to better understand where prices have been and where they are likely to go.

Before we turn to the specific fundamental inputs, it is important to introduce the context in which markets interpret the fundamentals that is, the bigger themes and expectations.