Fundamental Analysis in Forex Trading

Fundamental analysis is one of the primary methods of market analysis. It aims to predict market trends by examining economic, social, and political factors that may influence the supply and demand of assets. If you prioritize fundamental analysis, it can provide significant guidance for your trading. The logic is simple: prices are determined by supply and demand.

Using supply and demand as indicators to predict price movements is straightforward, but the challenge lies in analyzing all the factors that affect supply and demand.

In other words, you need to determine which economies have strong fundamentals and which ones are weak. You must understand why and how data such as rising unemployment rates can impact a country's economy and, ultimately, the market's demand for its currency.

The core idea of fundamental analysis is that if a country's current or future economic outlook is positive, its currency should remain strong. The better a country's economic fundamentals, the more foreign businesses and investors will invest in it, increasing the demand for its currency to acquire its assets.

For example, as the U.S. economy improves, the U.S. dollar continues to strengthen. With the economy recovering, the Federal Reserve may need to raise interest rates to control excessive growth and inflation.

Higher interest rates make dollar-denominated assets more attractive. To acquire these assets, investors first need to buy U.S. dollars. As a result, the value of the dollar strengthens.

In later lessons, you will learn which economic indicators affect currency prices and why they do so. We will also demystify the Federal Reserve and explain how retail sales data reflects economic conditions.