In fundamental analysis, forex traders look at the "fundamentals" to estimate the effect on the currency price. These are some of the factors to consider in fundamental analysis:
* 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)
(Who watches these fundamentals and releases the information about them? The central banks of each country are responsible for the economy of the country, so they carefully watch the factors that affect it: the fundamentals. These central banks announce the economic factors monthly or weekly, at specific times that are publicized in advance.
Another term for these factors is "indicators", which you will hear often in forex trading.
Of course, experienced forex traders usually know what to expect of these indicators, and have positioned their trades accordingly. Indicators that conform to these expectations will cause little effect on the market.
(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. (This is probably not wise, however, and a combination of fundamental and forex technical analysis is a better basis for forex trading.)
(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. It has been said that when they speak, traders listen --- and base their trades on what they hear.
(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. Two of the major economic drivers that affect the forex market are interest rates and inflation, so listen carefully when knowledgeable financial experts talk about them.
(Forex fundamental analysis is made all the more complicated because accurate measurement of the variables and their relationships is difficult. Much of the process depends on estimates based on historical experience. What is happening in the world, such as major political events or wars and other international catastrophes, can also cause certain assumptions to be made. 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.
(There's nothing more fundamental than supply and demand, and that certainly holds true in the forex market. If other factors have caused the supply of a currency to decrease but the demand remains at the same level, the price will increase again. The opposite also holds true: if demand stays the same while prices have increased, eventually the price will decrease.
(This is a basic overview of forex fundamental analysis.(
