8. Fundamental Analysis

Fundamental analysis includes analysis of economic, social and political events in various ways affecting supply and demand for a currency. By analyzing various factors you draw conclusion whether this or that country’s economy is prosperous or in recession. The healthier a country's economy is, the more foreign companies and investors would like to invest their capital.
Let’s suppose, US economic indicators show stable positive dynamics, and as the country’s economy gets even stronger a necessity emerges to increase interest rates to hold down inflation. Higher interest rates make dollar-based financial assets more attractive. In case interest rate set by the FRS of USA is higher than interest rate set by the Bank of Japan, this would inevitably lead to appreciation of USD against JPY (USD/JPY). What is the reason for this? The case is that today the most reliable investment instruments are government securities and bank deposits with interest rates directly depending on a central bank’s rate. Taking present-day free floating of capital into account, investments are channeled to countries with the highest interest. For instance
Bank of Japan rate 0,5%
US Federal Reserve rate 5%
Naturally, the most advantageous decision would be to buy dollars and consign them to an American bank. In turn, increasing demand for a certain currency leads to its further growth of its exchange rate. Generally, economic indicators form large set of data used within the frame of fundamental analysis. An indicator’s numerical value is not as important as accordance of  preliminary analytical estimates to actual  data. The most dramatic ups and downs in exchange rates occur exactly in case of substantial deviation of actual data from predicted values. Besides interest rates the most important fundamental indicators include GDP, balance of trade, unemployment rate, inflation rate, etc. All these factors, to a certain extent, reflect a state of national economy, and therefore affect national currency’s exchange rate. Forecasting and analysis of economical factors is not of considerable complexity. However, you should remember that the market is driven not by the factors themselves, but by expectations, i.e. expected results of a country's economical activity.

News factors

Everyday tens of quite significant events occur that we find out about from television, newspapers or web pages. Quite often these events turn out to be sudden for general public and affect financial markets severely. These may be both statements of politicians or heads of central banks and technological or natural disasters. These events are subjects for the most complicated part of analysis, for they can hardly be predicted, which requires a trader to make lightning-fast and cold-blooded decisions. The situation is also complexified by the fact that similar events might lead to absolutely different results. For example, a natural disaster is, formally, ugly news for an economy and therefore it should cause national currency's exchange rate to fall. However, regularly occurring floods in Europe haven’t ever led to significant changes in Euro's exchange rate. This is due to the fact that, for one thing, floods didn't harm key economic structures, and for the other thing, any country possesses emergency funds mostly neutralizing aftermath of such disasters. In conclusion, it's worth noticing that the main complexity of the fundamental analysis is a large number of fundamental factors co-existing in the market at the same time. Some of these factors contribute to increase in prices, while the others instead lead to a currency’s exchange rate decrease.

To ensure efficiency of your operations in the Forex market we advise you to use the economic events calendar , with the help of which you can find out, what economic indicators are going to be published soon and visually estimate the extent of their influence on the market.