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FUNDAMENTAL ANALYSIS

What influences Prices in the Forex Market?

Prices in the currencies market are affected by macroeconomic factors, such as inflation,
unemployment and industrial production. Information on events such as these is easy to find.
Fundamental analysis is based on the analysis of economic data; traders try to use this information
to take positons in the market in order to make profit.

There are three main macroeconomic factors a trader should focus on when analysis foreign
exchange rates:

a. Interest Rates:

Each currency has an overnight lending rate. This is determined by a country’s central bank. Lower
interest rates usually lead to the value of the country’s currency declining. This is largely due to
traders who execute carry-trades. A carry –trade is a trade where a currency with a low interest rate
is sold and a currency with a high interest rate is bought. This is based on the idea that currencies
with higher interest rates will generally rise in value and will rollover-and allow traders to earn
interest on a daily basis.

b. Employment:

The unemployment rate is a key indicator of a country’s economic strength. If a country has a high
unemployment rate, it means its economy is not strong enough to provide people with jobs-and this
leads to a decline in the currency value.

c. Geopolitical Events:

Key international political events affect not only the foreign exchange market, but all other markets
as well.

Fundamental Analysis Techniques

How does Fundamental Analysis explain Long Term Trends?

Fundamental analysis is very useful for determining long term trends within a currency pair. By
focusing on long term economic factors that affect countries, fundamental analysis predicts long
term trends.