What is fundamental analysis?
Fundamental analysis is the study of global economic news and indicators affect financial markets. It covers everything from a company's profits for the year to interest rates. It can range from social change such as a growing middle class in China to essential monetary policy.
The most important thing to remember with fundamental analysis that it all the factors dealt with - interest rates for Forex, consumer demand for commodities and profits for stocks – are almost always already factored into the price when you trade.
For Forex trading, the most important piece of fundamental analysis news comes from central banks. Policy statements from the US Federal Reserve, the Bank of England and the European Central Bank are the key announcements. Even these, however, are only really vital if you are intra-day trading.
Interest rates are the key indicators in the Forex market (see carry trade article for how these can alone are sometimes used by traders to make money from Forex trading).
Gross domestic product is a key economic indicator and is used for fundamental analysis. It shows the overall state of a nation's economy. Results are released quarterly and are worth keeping an eye on for a basic understanding of how the world and individual economies are moving.
Inflation is essentially a measure of how much a currency loses value. It has a bearing on Forex trading in as much as if inflation in the UK is four per cent and in Japan its zero per cent, one British pound will buy four per cent less yen each year, assuming all else is equal (which invariably it is not).
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