Have You Analyzed the Fundamentals Today?
In forex trading, everyone aims to predict exchange rates accurately to secure profits. This is the foundation of successful trading.
Forex analysis methods are divided into fundamental analysis and technical analysis. Historically, debates over which method is superior have persisted. Here, we concisely explain both approaches and highlight their pros and cons. If you’ve mastered technical analysis, adding fundamental analysis to your toolkit will significantly enhance your trading. Fundamental analysis focuses on long-term currency trends (qualitative), while technical analysis determines entry/exit price points (quantitative).
Key Factors in Fundamental Analysis
Exchange rate fluctuations may seem unpredictable, but they follow core principles. Major influencing factors include:
-
Economic Growth Rate
This is the most basic factor. A country’s currency typically appreciates if its economy grows faster. The U.S. dollar dominates forex markets, so U.S. economic data is critical. For example, poor U.S. economic data can trigger a sharp dollar decline. On November 6, 2002, the Fed cut rates by 50 basis points—the lowest since July 1961—due to rising unemployment, manufacturing contraction, and falling consumer confidence, causing the dollar to breach key support levels. -
Balance of Payments
This includes trade in goods/services and capital flows. A trade surplus signals a strong economy, boosting currency demand and value; a deficit has the opposite effect. -
Money Supply
Central banks control money supply, which heavily impacts exchange rates. During slowdowns, they may increase supply and cut rates (easy policy); during overheating, they may tighten policy to curb inflation. -
Interest Rates
Rates and exchange rates are closely linked. Capital tends to flow from low-rate to high-rate countries to exploit interest differentials (a strategy called "carry trade"). For instance, prolonged U.S. rate cuts led to sustained dollar depreciation against major currencies.
