Forex Fundamental Analysis  

Forex Fundamental Analysis
A fundamental trading strategy consists of strategic assessments in which a certain currency is traded based on virtually any criteria excluding the price action. These criteria include, but are not limited to, the economic condition that the country the currency represents, monetary policy, and other elements that are fundamental to economies.
The focus of fundamental analysis lies on the economic, social and political forces that drive supply and demand. There is no single set of beliefs that guide fundamental analysis, yet most fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. Several theories prevail as to how currencies should be valued.
Alone, fundamental analysis can be stressful when dealing with commodities, currencies and other "margined" products. The reason for this is that often fundamental analysis does not provide specific entry and exit points, and therefore it can be difficult for risk to be controlled when utilizing leverage techniques.
Currency prices are a reflection of the balance between supply and demand for currencies. Interest rates and the overall strength of the economy are the two primary factors that affect supply and demand. Economic indicators (for example, GDP, foreign investment and the trade balance) reflect the overall health of an economy. Therefore, they are responsible for the underlying changes in supply and demand for that currency. A tremendous amount of data is released at regular intervals, and some of this data is significant. Data that is related to interest rates and international trade is analyzed very closely.
Interest Rates
If there is an uncertainty in the market in terms of interest rates, then any developments regarding interest rates can have a direct affect on the currency markets. Generally, when a country raises its interest rates, the country's currency will strengthen in relation to other currencies as assets are shifted to gain a higher return. Interest rates hikes, however, are usually not good news for stock markets. This is due to the fact that many investors will withdraw money from a country's stock market when there is a hike of interest rates, causing the country's currency to weaken. Knowing which effect prevails can be tricky, but usually there is an agreement among the field as to what the interest rate move will do. PPI, CPI, and GDP have proven to be the indicators with the biggest impact. The timing of interest rate moves is usually known in advance. It is generally known that these moves take place after regular meetings of the BOE, FED, ECB, BOJ, and other central banks.
International Trade
The trade balance portrays the net difference (over a period of time) between the imports and exports of a nation. When imports become more than exports, the trade balance shows a deficit (this is --for the most part-- considered unfavorable). For example, if Euros are sold for other domestic national currencies, such as US Dollars, to pay for imports, the value of the currency will depreciate due to the flow of dollars outside the country. On the other hand, if trade figures show an increase in exports, money will flow into the country and increase the value of the currency. In some ways, however, a deficit in and of itself is not necessarily a bad thing. A deficit is only negative if the deficit is greater than market expectations and therefore will trigger a negative price movement.