2.14 Fundamental Analysis

Fundamental analysis for Forex trading.
 
Fundamental analysis is the evaluation of the market for a country’s currency by looking at its economy. We look at all the factors that taken together tell us whether the economy is in good shape, or on the rocks.
 
If a country’s economy is growing and robust, investors around the world would like to invest in that country. To do this they would exchange their home currency for the currency of this country, causing a rising demand for it in the FX markets. This rising demand would push up its value.
 

 

Economic Indicator

 

Effect on Currency

 

Increase in Unemployment

 

Increase in unemployment is bad for economy and hence currency.

 

Increase in interest rate

 

Higher interest rates help in carry trades and make a currency lucrative.

 

Higher GDP growth

 

GDP is one of the most important fundamental to gauge the strength of an economy.
 
Conversely, investors withdraw funds from an economy which is in the doldrums, causing excess supply of the currency in the FX markets, which results in a fall in its price.
 
Investors assess an economy by looking at various indicators such as employment, inflation and interest rates and growth in GDP, among others economic indicators. In the figure above we have given a teaser trailer of what happens to a currency when such indicators improve or deteriorate. We’ll cover this in more detail in a later chapters. This is not the time to go in the further depths but if you can't resist then check Forex fundamental analysis and economic indicators for more details.
 

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