What is Fundamental Analysis?
Fundamental analysis is a way of judging the forex market by analyzing social, economic, and political forces that may affect the supply and demand of an asset. This is the most basic idea behind the price movement.
Supply and demand is the ultimate thing that determines the price. See our article on how the currency exchange rates are determined for more details.
The "supply and demand" itself works as an indicator.
And by anticipating the supply and demand you can predict the movement of price. But the hardest part is the process of analyzing all of the factors that could affect the supply and demand.
You have to consider at all the different factors to determine whose economy may go up and whose economy may go down.
Moreover, you have to clearly understand the reasons of why and how some events like an increase in the unemployment rate or increase in interest rate affects a country’s economy and thus, affects the level of demand for its currency.
The foundation idea behind the fundamental analysis is that if a country’s current or future economic prospect is good, their currency should strengthen.
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The better the condition of a country’s economy, the more foreign investors will be interested to invest in that country. This will then increase the need to purchase that country’s currency to obtain those assets.
For example, if the USA increases the bank interest rate, the dollar-denominated financial assets will get more attractive to international traders.
And to invest in those assets, they have to buy some US dollars first, which will then result in the increase of the value of the US dollar.
There are much more economic data points that you will need to analyze before arising to a conclusion regarding price movement. One of the most popular trading styles depending on the fundamental analysis is called as news trading, which we will learn in later chapters.
See our free fundamental analysis course to learn more.