Fundamental Analysis

Fundamental analysis is a technique for assessing the intrinsic value of an asset and examining the factors that may impact its future price. This analysis relies on external events and influences, along with financial statements and industry trends. The primary aim of fundamental analysis is to ascertain whether an asset is overvalued or undervalued.

For stock traders, fundamental analysis entails a detailed examination of individual companies' income statements and balance sheets. However, the definition of fundamental analysis shifts when applied to currency trading.

In the context of forex, fundamental analysis seeks to understand market valuation changes by evaluating the economic, social, and political forces that influence the supply and demand for a currency. The underlying principle is that a favorable current or future economic outlook for a country should lead to a stronger currency.

This type of analysis involves investigating economic trends and geopolitical events that could impact a currency's price. A robust economy attracts more foreign businesses and investors, creating a demand for that country's currency to acquire those assets.

While the appeal of a country's goods and services affects currency demand, investment opportunities within the country also play a significant role. Forex traders often buy or sell currencies based on their predictions regarding exchange rate fluctuations due to:

• Political instability in the country or abroad.
• Uncertainties in the global market. For instance, during the recent Coronavirus Crisis, the demand for U.S. dollars surged as investors sought a safe haven for their funds.
• Variations in interest rates between countries. When a country's interest rates rise, its currency tends to appreciate as foreign investors look for higher returns than those available in their own nations.
• Differences in economic growth among countries. For example, developing nations that have successfully implemented economic reforms may see their currency appreciate as foreign investors pursue new growth opportunities.

Forex traders who employ fundamental analysis often monitor price movements while also keeping an eye on financial news. They analyze news for insights into the political landscape, international relations, natural disasters, and other global occurrences.

In addition to the factors already mentioned, fundamental elements that many traders consider when deciding whether to enter, maintain, or exit a trade include unemployment rates, inflation, changes in fiscal policy, and the performance of stocks, bonds, and money markets.

For instance, if the U.S. dollar is strengthening due to an improving U.S. economy, it may necessitate raising interest rates to manage growth and inflation. Higher interest rates enhance the attractiveness of dollar-denominated financial assets. Consequently, traders and investors must first purchase U.S. dollars to acquire these desirable assets, leading to an increase in demand and, likely, the value of the U.S. dollar.

While fundamental analysis considers a broader perspective surrounding an asset's price by evaluating numerous influencing factors, technical analysis focuses solely on historical market data and charts. Fundamental analysis aims to determine the true value of a trading asset, whereas technical analysis serves as a tool for examining historical price movements based on trends, chart patterns, and technical indicators.