Fundamental analysis involves poring over economic data reports and news stories, while technical analysis involves poring over charts to detect patterns or trends. (And, more recently, a certain world leader’s random tweets.)
Fundamental analysis is a method of analyzing economic, social, and political forces that may influence currency prices in the forex market.
This makes a lot of sense when you think about it! Supply and demand, much as in your Economics 101 class, influences price, or in our case, the currency exchange rate.
It’s easy to use supply and demand as a predictor of price movement. The difficult part is determining all of the variables that influence supply and demand.
To put it another way, you have to consider a variety of variables to decide whose economy is rockin’ like a Taylor Swift song and who’s economy is suckin’ like a Taylor Swift song.
You must comprehend why and how phenomena such as a rise in the unemployment rate impact a country’s economy and monetary policy, which, in turn, influences the level of demand for its currency.
This form of analysis assumes that if a country’s current or potential economic prospects are favorable, its currency can improve.
More international companies and investors would invest in a country whose economy is in better shape. This necessitates the acquisition of that country’s currency in order to acquire those properties.
In a nutshell, this is what fundamental analysis is:
Let’s say the US dollar has been strengthening as the economy in the United States improves.
As the economy improves, higher interest rates will be needed to keep growth and inflation under control. Dollar-denominated financial assets become more appealing as interest rates rise.
Traders and investors must first purchase some greenbacks before they can get their hands on these lovely properties. This increases the currency’s demand.
As a result, the US dollar’s value would likely rise against other currencies with lower demand.
You’ll learn later in the course which economic data points appear to drive currency prices and why they do so.
You’ll learn who the Chairman of the Federal Reserve is and how retail sales data represents the economy. Like song lyrics, you’ll be spitting out global interest rates.
To use fundamental analysis effectively, you must first understand how historical, financial, and political events affect currency exchange rates.This necessitates a solid grasp of macroeconomics and geopolitics.
There’s no need to be intimidated by such esoteric terminology. For the time being, just know that fundamental analysis is a method of determining the strength or weakness of a currency’s future movements based on the strength or weakness of that country’s economic outlook. We guarantee it will be fantastic!
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