Forecasting in Forex: An Introduction to Fundamental Analysis

Technical analysis accounts for the numerical probabilities, patterns, and forecasts involved in forex trade. It is important to note, however, that forex trading involves more than just figures and numbers. All the factors that affect world markets and commodity prices are pretty much the same factors that affect currency exchange. Simply put, factors aside from historical numerical data also affect the forex market. For a more comprehensive view of the entire forex trading situation, it is therefore important to take these non-numerical factors into consideration,. That’s where Fundamental Analysis comes in.

Fundamental analysis is involved with studying current economic situations and interpreting how these would affect the forex trade. Fundamental analysis covers a lot of ground, and often, the situations it takes into consideration cannot be simply summarized in a short list. Throughout the years, however, a few recurring factors seem to have the biggest impact on forex trade, making them important things to watch out for when joining the trade.

Political Stability

Political unrest often translates to a weaker currency. Similarly, government systems with increased popularity ratings usually lead to the strengthening of a country’s currency. Be on the lookout for any political issues on the country whose currency you are using for trade.

Another noteworthy fact about the effects of politics on forex is that elections also tend to shake the market prices around a bit. Overall, political stability is not a bull’s eye way of forecasting forex prices, but if you are keen enough to observe, you could see some patterns forming, which might be of help in the long run.

Interest Rates

Higher interest rates mean a stronger currency. That is because higher interest rates are generally attractive to investors, as these would mean higher returns for them.

Higher interest rates could also come from an increase in GDP, or Gross Domestic Product. GDP is also a good factor to look out for, as it often precedes interest rates, which means you have the chance to make decisions earlier on.

Employment and Poverty rates

Low employment and high poverty rates mean that the people have a smaller purchasing power. Smaller purchasing power also translates into lagging economic activity. To compensate for this, interest rates have to go down – consequently leading to a weaker currency.

Fundamental analysis is able to tell and view forex trading in many angles, however, it does not truly form the whole picture. To get the entire picture at every angle, it is best to use both fundamental and technical analysis methods.