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Fundamental Analysis: Complete Guide to Professional Forex Analysis

Fundamental analysis is the process of analyzing the fundamental factors affecting financial markets in order to predict the future price. Forex fundamental analysis tackles the overall state of the economy and examines various fundamental factors including interest rates, employment rate, GDP, international trade, and manufacturing, to evaluate their relative impact on the value of the national currency.

Fundamental analysis in the Forex market does not focus only on comparing the current data of single economic indicators to previous data, but attempting to put all pieces of economic data in context, to see the big picture. 

What is Fundamental analysis?

Fundamental analysis is evaluating the price of a currency and the factors that could influence its value in the future, including external influences, as well as financial statements and economic trends. 

Fundamental analysis is one of two major types of market analysis, along with technical analysis.

While technical analysis focuses on deriving all the information from price charts and historical movements, fundamental analysis depends on external factors that are surrounding the asset.

Understanding Fundamental Analysis in Forex

The main concept of fundamental analysis is that if a country’s current or future economic state is strong, its currency should strengthen. This is because a strong economy attracts foreign investment and businesses, which means foreigners tend to purchase this country’s currency to invest or start a business. 

Essentially, it all narrows down to the supply and demand equation; a country with a strong and growing economy will enjoy stronger demand for its national currency. That leads to lower currency supply and drives up the value of the currency.

What are the best fundamental analysis tools?

Analyzing the market can be a time-consuming and complicated task to do during trading hours and requires extensive skills. Therefore, it is important to select the best fundamental analysis tools and the most reliable resources in order to achieve higher efficiency with your market analysis and to manage your trading strategy properly. Thus it is a time-consuming process to go through all of the economic reports such as employment rates, inflation reports, interest rates, and other data, the fundamental analysts need to rely on effective tools in order to determine trading opportunities.

Economic Calendar

What is the Economic Calendar? It is a list of pre-scheduled financial events, which affect the financial markets. The economic calendar includes the top economic reports and news releases such as monthly unemployment reports, central banks meetings, the International Monetary Fund (IMF), and more. The economic calendar has a set of important economic indicators including (GDP, CPI, PMI, Trade Balance). Therefore, it is considered as the main tool forex trader and is commonly used to get an overview view of financial events which will affect currency prices. Eventually, all forex traders use the economic calendar in their daily routine and there are several useful online resources with an extensive economic calendar such as MQL5 and investing.com.

Economic Calendar

Economic Reports

Globally, each country regularly releases economic news with data about inflation rates, retail sales, the gross domestic product (GDP), unemployment rates, and Nonfarm Payrolls (NFP). Reviewing the economic reports allows forex traders to identify the price movements and predict the changes in the currency pairs. The economic reports are typically provided in a form of time series which is covering more different periods or in the format of cross-sectional data. The reports can be always found on official websites for the public to review. However, the traders usually tend to review the news websites and read the analysis of experts instead of checking the reports by themselves since the impact of the report on the market is more important for forex traders. There are a wide variety of news resources that can be found online, however, it is important to select a reliable market news source for daily updates and weekly outlooks.

Analysis tools & solutions

There are several financial analyses platform which offers advanced technology for scoring or rating the impact of news releases on each currency pair or gold. Usually, these solutions would range from free tools to paid tools and mobile apps. The most popular tools are provided by major companies and portals such as investing.com, Bloomberg, Trading Central, and more. In the past few years, technology is getting advanced and there are many tools that rely on AI and ML to provide more accurate sentiment rates.

Thus, the traders should always learn forex analysis and how to use the main tools such as Economic Calendar, Economic reports, and reliable news sources. In addition, it is crucial to set up the right trading strategy with the right indicators and the proper trading plan.

What are major Economic Indicators used in Fundamental Analysis?

Interest rates, inflation, and GDP are the three main economic indicators used in Forex fundamental analysis. Of course, there are various other indicators to consider including trade balance, retail sales, and employment data. Not to mention monetary decisions, fiscal policy changes, and political stability. It’s important for you to take time to look at the numbers and understand what they mean and how they can influence a nation’s economy.

Interest Rates

Interest rates are essential when it comes to fundamental Forex analysis. Manipulating interest rates, as a part of the national monetary or fiscal policy, is one of the primary functions of central banks. This is because interest rates are a great factor of the economy, and stronger than any other factor in influencing currency value as well as inflation, investments, trade activity, production rate, and unemployment.

Inflation Data

Inflation report reflects the fluctuations in the cost of goods over a period of time. Note that every economy has a level of what it considers as healthy inflation, usually around 2% in many countries. As the economy grows, the amount of money in circulation grows which is the definition of inflation. Here the governments and central banks interfere to balance inflation around the target level. High inflation affects the balance of supply and demand in favor of supply, so the currency depreciates as the supply surpasses demand. There is an opposite term for inflation which is deflation. During deflation, the value of money increases, so goods and services become cheaper.

GDP Numbers

The Gross Domestic Product is the total goods and services produced by an economy within a given period. It is considered to be the best indicator of the overall health of an economy. The change rate in GDP over a period of time can tell you a lot about the health of the economy, whether it is growing or shrinking. Consequently, it is used as an indication of the strength of a country’s currency. Any increase in GDP is likely to have a positive effect on the value of the currency, opposite to when GDP shrinks. 

Retail Sales

The Retail Sales report is another important indicator in fundamental analysis which allows to measures the total sales of all retail sector in the country. These figures are highly effective in indicating consumer spending patterns in correlation with seasonal variables. This indicator is usually used to assess the current direction of an economy.

Fundamental Analysis in Forex

Examples of Fundamental Analysis

There are many tools and techniques that can be used for fundamental analysis, but they can be shortlisted into two types; top-down analysis and bottom-up analysis. The top-down analysis takes a broader view of the economy, starting with the entire market before narrowing it down into a specific sector, industry, or company. It uses comprehensive factors as a basis for decision-making. The top-down approach seeks to identify the big picture and all of its components that are usually the driving force for the main goal.

On the other hand, bottom-up analysis takes a completely different approach.  It starts with a specific stock and widens out to consider all the factors that impact its price. Generally, the bottom-up approach focuses its analysis on specific characteristics of an individual asset and its valuations in comparison to the market.

The tools that traders might choose for their fundamental analysis vary depending on the asset that is being evaluated for trading. For example, stock traders may choose to look at the figures in a company’s earnings report focusing on profit margins, projected growth rate, earning per share (EPS), and revenue. While forex traders choose to assess the official figures that allow insight into the state of a country’s economy. Economic indicators are reports released by the government or a private organization that shows a country’s economic performance. It is an official method by which economic health is measured, but remember that many factors and policies affect a country’s economic performance as well.

What are the Top Challenges with Forex Market Analysis?  

Forex analysis in general is not for everyone and it is not a straightforward formula with easy to figure tricks. Even the most experienced forex traders would invest a lot of time and effort analyzing the currency pair charts and studying the numerous economic reports and even exploring different views of the market conducted by professionals. Therefore, fundamental or technical analysis is not based on quick tips or ready-to-use forex signals. The process of market analysis is a journey of learning forex and financial markets which leads to extensive understanding and more profitable decision making.


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