Forex fundamental analysis is simply a method of using the "fundamentals" in a certain market to gauge how the currency price will be affected. There are many fundamentals to analyze, including these market movers:
* Economic conditions
* Political environment, particularly with regard to stability
* Interest rates
* Supply and demand for the currency
* Government policies
* Historic performance of the currency
* International trade position --- deficit or surplus
* Consumer price index (CPI)
* Gross domestic product (GDP)
* Cost of producing goods (PPI)
(Each country's central bank oversees the economy, and the fundamentals that affect it. These central banks announce the economic factors monthly or weekly, at specific times that are publicized in advance. These factors are called "indicators".
(You must understand that these indicators are always pretty much expected by the market even before the announcement. Forex traders position themselves accordingly in the market. If the announcement shows the indicator to be much as expected, there will be little or no movement in the currency.
(On the other hand, if these expectations are not what actually occur, currency prices will definitely move. This is the basis of forex fundamental analysis, and many traders rely on it exclusively. I personally, however, recommend a combination of fundamental and technical analysis.
(The European Union's ECB, the U.S. FED, the U.K. BOE and the Japanese BOJ have the most influence of all the central banks. Forex traders are wise to pay attention to these bodies in their trading.
(As in many business environments, the forex is affected most by U.S. indicators. Although the ECB indicators have less impact, they can make a difference when they are different from what the market expected. Pay particular attention to what senior banking and financial officials have to say about the two main economic drivers, interest rates and inflation.
(Measuring the relationships among the fundamentals is a difficult task, which makes fundamental analysis all the more complex. Much of the process depends on estimates based on historical experience. On the opposite side, assumptions are often made on the basis of what's happening in world news, such as wars, inflation, major political changes, etc. They are, however, only assumptions and they may not happen as expected. It can take a while for the markets to adjust to the reality.
(The forex market is, like life itself, subject to the law of supply and demand. If currency prices remain at the same level despite a decrease in demand, eventually the price will increase. If the supply increases while the demand stays constant, the price will eventually decrease.
(This is a very basic explanation of forex fundamental analysis.(
