Forex Fundamental Analysis & Fundamental Trading Guide

As a trader, you will need to know a few of the basics relating to forex fundamental analysis.

One of the most important first steps as a forex trading beginner is education and research, that is the same regardless of the topic. You wouldn’t be foolish enough to jump into the deep end of the swimming pool without first learning to swim, and forex trading is no different.

The success that you experience with forex trading starts with you.

Your desire, and need, to educate and familiarize yourself with this new complicated world of forex can be make or break.  

We will cover here at a key topic that all new traders need to be aware of. A beginner’s look at forex fundamental analysis and fundamental trading.

Forex Fundamental Analysis Explained – The Introduction

USD forex fundamental analysis
Fundamental analysis forex USD

Forex fundamental analysis is the study of the underlying factors that can affect the price of a currency.

This includes things like economic indicators, central bank policy, and global events. By understanding these factors as a forex trader you can get a better idea of where prices are likely to go in the future.

One of the most important economic indicators for forex traders is inflation. When inflation is high, it can lead to higher interest rates and a stronger currency. Central banks often use interest rates to control inflation. If central banks raise interest rates, it can make their currencies more attractive to investors and lead to higher demand.

Global events can also have a big impact on forex prices. Things like natural disasters, political unrest, and major announcements can all lead to price movements in the forex market. As a trader, it’s important to be aware of these events and how they might affect the currencies you’re trading.

By understanding forex fundamental analysis, you can get a better idea of where prices are likely to go in the future. This can help you make more informed trading decisions and potentially make more profits.

Fundamental Trading Forex Markets

Fundamental trading is a strategy that focuses on economic indicators to make decisions about when to buy or sell a currency pair. This type of trading can be used in any instrument, but is most often used in the forex market.

Forex fundamental trading is based on the idea that currencies are priced according to economic conditions. For example, a country with a strong economy is likely to have a strong currency, while a country with a weak economy is likely to have a weak currency.

By analyzing economic indicators, traders can get an idea of whether a currency is undervalued or overvalued, and then make trades accordingly. Fundamental trading forex requires a lot of information, but those who are good at deciphering this information can be very successful.

One of the most important things for fundamental traders to do is to stay up-to-date on economic news. They will often use economic calendars to track upcoming events, and then make trades based on how they expect the market to move in response to those events.

Fundamental trading forex markets can be complex, and it is often best suited for experienced traders due to the level of information to be considered. That being said, one key piece of fundamental information can still swing a nice move.

Get the basics right with forex fundamental analysis & technicals

When starting your forex journey, you will need to get a grasp of what you are looking at, and how to interpret it. This is called analysis.

Forex market analysis usually falls into two main camps which we delve into below. These are forex fundamental analysis, and technical analysis.

Technical Analysis In Trading

Technical analysis is a vital part of trading and is concerned with the technical details. TA commonly involves looking at pricing data, charts and potential entry and exit points based on collected data.

This technical data is often presented to you on charting software that includes different types of trading chart overlays and technical indicators. You can think of your technical analysis in forex as the ‘specifics’.

Fundamental Analysis In Forex

Fundamental analysis differs from technical analysis as it does not focus on the technical raw data to draw conclusions.

Forex fundamental analysis looks at the macroeconomics of a market, and focuses on external factors that could impact currency prices and cause fluctuations. Whilst there is detail in the topics, fundamental analysis is a lot more broad in scope.

Is technical or fundamental analysis more important in forex trading?

If you focus either on technical analysis, or fundamental analysis only, this will not give you the best results.

As a forex trader, if you were to base all your trades on technical analysis you could well be ignoring an important external event that may cause a fluctuation in the wrong direction. This will cause a loss in the process.

We can apply technical analysis and fundamental analysis to more mainstream life scenarios and see the logic and fruitfulness behind using a combination. 

Fundamental Analysis Vs Technical Analysis Non Forex Example

fundamental analysis property investment

Let’s take a look at rather non trading related example of buying a house.

This most certainly is not a decision taken lightly, and would be a topic that involves a lot of research. Usually that would be the case with most important financial decisions.

You would look at similar properties, check out different locations, and external factors that may add value; like being close to schools, good transport links, and the average performance of house prices in the country.

Having this array of research done and with all this information at your disposal can help you understand and factor in how external points can impact the price. This in effect would be your house buying version of forex fundamental analysis.

The technical analysis aspect of a house purchase could include how many bedrooms it has, what is the energy efficiency, the average sale price of properties in the same street over the past few years, how many square meters it has, and the average price per m2 for property in this location. 

Both of these sets of information, I’m sure you would agree are vital ingredients in a house purchase. Together, they would give a much more rounded evaluation of suitability than using one set of information exclusively.

What is true for an important financial decision in the unrelated world of property investment, is equally important in your financial trading.

Forex Fundamental Analysis

Now let’s move this back to forex fundamental analysis.

Whilst we have said that both fundamental and technical analysis play equally important roles in helping you trade and profit; there are trading strategies, and plans that revolve solely around either one or the other.

This is referred to as fundamental trading or technical trading.

Fundamental analysis with forex starts with the news. Keeping up with socioeconomic events is vital to your fundamental analysis research. 

Swiss Franc Decoupling In 2005 Massive For Forex Fundamental Trading

For example, if you are trading in CHF and there has been an announcement that there will be a decoupling with EUR, this is going to be massively important.

swiss franc decoupling forex fundamental trading

If this comes completely unexpectedly as actually happened in 2015, there was subsequently a huge impact on the trading value of the currency with CHF rising by more than 23% overnight.

This caused massive fluctuations that could not be predicted by technical indicators and those receiving the news first would have had the maximum opportunity.

There were countless traders, and brokers alike caught out by this event, and sent shockwaves through the forex markets in general.

If you look only at pricing patterns and disregard all the external factors, you may miss out on a huge opportunity.

A chart alone cannot account for these outside factors.

The main data points to look at in forex fundamental analysis

Forex traders with a liking for fundamental trading will look at the GDP of a country, inflation, unemployment rates, and political situation, amongst many other data points. There are huge amounts of fundamental analysis resources available on various trading portals.

Each of these factors could have a direct impact on the value of a currency, which can in turn affect your profitability.

Gross Domestic Product (GDP)
GDP fundamental trading data point, Germany EUR coins

This is the measure of the total value of goods and services produced in a country over a specific time period, usually 1 year. 

It is particularly useful for a forex trader to analyse an economies’ GDP to see how well it is performing and to spot trends.

You will also want to consider looking at the GDP breakdown by business sector to look a little further into these trends and to see where an economy is headed longer term.

It is typical that the more mature economies will have larger services income, and the more developing economies will have more in manufacturing. Knowing where an economy is heading and how it is maturing will give you a more detailed picture of where it is vulnerable.

If an economy is growing and performing well, companies will usually generate higher profits, meaning potentially higher wages.

All these combined result in a more valuable economy, and this would mean theoretically a higher currency value, provided the growth is outstripping that of others’.   

Inflation
inflation as a fundamental trading driver
Inflation can make 100 euros buy less than that

Normally represented as a percentage, inflation is the rate at which the level of consumer goods and services are rising.

Inflation is a key indicator that is usually ‘managed’ by the central bank of each country. It is not controlled, but ‘managed’ only in that they will have a target range of acceptable inflation.

Any indication of fluctuation outside of this acceptable range could cause them to intervene. 

The Central Banks will at various stages, make interventions by adjusting interest rates for one thing. This is done to stabilise the economy and to ensure that the country does not enter periods of deflation, or at the other end of the scale, hyperinflation. 

Forex traders would keep a close eye on a country’s inflation as it is likely that when if the numbers get outside of the usual target range of an economy, they could intervene.

Intervention by way of interest rate changes has a material and direct impact on the currency value.

Unemployment rates
unemployment as a fundamental economic data point

The rate of unemployment would also be a good figure to keep an eye on as it is a good signal of overall economic health.

A strong trend of reducing unemployment statistics would indicate that more jobs are being created. When more jobs are being created, this is as a direct result of businesses needing additional resources, usually to cater for growth.

A healthy economy and a reducing unemployment also brings a more wealthier population, providing the right kind of jobs are being created. In this positive scenario, a strengthening economy would be a good sign in relation to the currency in use in that particular country. 

The flip side of the above is also true, in inverse.

We can see from the mass activity of governments globally during the Covid-19 pandemic being mainly focused around job preservation and assisting businesses to retain employees.

Without this intervention, unemployment figures could have risen to catastrophic numbers and destabilised currencies in impacted regions.

Fundamental Analysis Forex Summary

If you are thinking this all seems like a lot of work and a huge amount of information to keep up with, you are right.

There are many day traders who ignore fundamental analysis forex trading, but this requires an advanced knowledge of technical analysis and technical indicators.

If you still wish to get involved in the world of forex trading but don’t know how to start, there are plenty of forex signals services that can provide you with most of the analysis and trading ideas for free.

Once you know what you should be aware of from a forex fundamental analysis standpoint, you can at least start to pick things up from the news that might trigger you to think in different ways about the markets.

It is not an easy thing to be a successful trader all on your own, and a trading community and trusted group of like minded individuals will definitely help.