Fundamental Analysis in Forex

Don’t you feel better after a good night’s sleep? 

For many of us, moods can be predicted by a few important factors. Getting enough sleep. A good, hot meal. Financial security. Time with loved ones. If we’re in a bad mood, we might be able to analyze these factors to see if there’s an obvious reason for it—as Snickers taught us, you’re not you when you’re hungry. 🤷‍♂️

Now, imagine instead of moods, we’re talking about fluctuations in currency pairs. The causes here aren’t sleeping well and getting enough veggies—but there are important factors that are likely to change a currency’s relative value for better or worse.  ⚖

If you understand these factors, you can make better predictions about how your investment might fare—just like you know how to predict that your uncle will get real cranky if you take him to a three-hour movie without going to lunch first. 

The collection of factors that impact currency prices create forex fundamental analysis. By understanding each of the major ways a currency’s price can be influenced, you’ll be able to make better decisions that are more likely to pay off in big bucks. 

Whether you’re following Bill Lipschutz’ advice to pay attention to details in forex, or looking for guidance on how to interpret Iran’s delayed plan to eliminate forex subsidies, learning fundamental analysis will help you up your forex game. This guide will help you understand what fundamental analysis is, what factors you need to understand, the limitations of fundamental analysis, and how to get started. 

What you’ll learn

• What is Fundamental Analysis in Forex?
• Forex Fundamental Analysis - Factors
• Limitations of Forex Fundamental Analysis
• How to Do Forex Fundamental Analysis
• Conclusion
• Get Started with a Forex Broker

What is Fundamental Analysis in Forex? 📚

If you’re day trading, you’re primarily working with technical analysis for stocks and forex. Technical analysis will have you spending time with all those wiggly charts that traders are such big fans of. While different financial markets will have their own time zones and unique differences, you can basically apply the same technical analysis tools to stocks or forex. 

If you’re considering a longer-term investment or checking up on your currency pairs, fundamental analysis helps you to understand the factors at play. For example, before investing in exotic currencies, you’d want to know that India increased their forex reserves by $289 million, while Nepal’s reserves have fallen, and Kenya’s reserves hit a new low.

Fundamental analysis differs more between the stock and forex markets, but both still rely on the principle of supply and demand. In fundamental analysis in forex, the desire for a nation’s currency is largely tied to its economy. Unemployment rates, fiscal policy, and political unrest all impact a nation’s economy—and the world’s perception of it. The stronger a nation’s economy, the higher the value of its currency. 

For example, the British pound (GBP) is one of the major currencies. When the British economy improves, the GBP becomes stronger. This might cause the Bank of England to raise interest rates, in an effort to control this growth. 

Higher interest rates add value to assets controlled by GBP, which in turn raises demand for GBP—causing it to become even stronger. Currencies can even change value based on expectations, such as the dollar falling from 16-month highs in anticipation of the Fed raising rates.

This gives a general sense of how fundamental analysis works in the forex market, and you can see how learning to read economic and political news is a crucial part of learning forex. Most forex strategies will recommend that you keep an eye on political and economic news in your targeted nations, but fundamental analysis helps you understand currency value on a deeper level. Now, let’s dive into the factors that make up fundamental analysis in forex.

The Factors That Go Into Forex Fundamental Analysis 📃

Just like your hunger might be a factor in you snapping at your buddy when she just asked what you were doing later, so too does economic policy impact a currency’s value. The only thing that would make this analogy better would be pouring chocolate syrup on a central bank (okay, now we can’t unsee that image). 

These factors can be understood through world news, economic reports, the actions of central banks, and more. Let’s dive in and get to know each of these individual factors in the forex market so that you can recognize and follow the indicators you need.

Economic Indicators 📝

Periodically, a nation’s government or a private organization will release an economic report. These reports provide indicators of the economy’s health, and are the only direct measurement of an economy (though remember, there are plenty of other factors affecting any economy than just those you can find in a report). These include unemployment numbers, housing statistics, and more.  

If you’re familiar with earnings reports and SEC filings in the stock market, economic indicators are the closest comparison in forex. They are released at scheduled times, and surprising findings in the economic reports can lead to significant changes in a currency’s relative value. 

Gross Domestic Product (GDP) 🗓

GDP tells you the total market value of all the goods and services a nation produced that year. While many see GDP as the broadest way to view an economy, it is also a lagging indicator, because it is only released once a year and thus does not give a snapshot of where an economy is in the current moment. 

Before the final annual GDP is released, there are two reports: the advance report and the preliminary report. These end up being more useful than the previous year’s official GDP. The reports are likely to stir up some volatility in the market, especially as they often offer different numbers. The GDP corresponds to a company’s profit margin in stock trading, as these factors allow the trader to measure internal growth of a company or nation. 

Industrial Production 🏭

Tracking a nation’s industrial production can indicate how strong its economy is. The industrial production report specifically shares changes in production of factories, utilities, and mines. You can also track “capacity utilization,” which shows how close to capacity their resources are. 

If a nation is increasing production at its highest capacity, that’s a very good sign. Utility production can be more volatile as it is impacted by weather and other factors.

For example, after news about huge floods that devastated farms in China in November 2021 dropped, we saw a spike in the value of the USD over the CNH. Even though the Chinese countermeasures to this restored traders’ faith in the yuan a few days later, this event opened multiple opportunities for strong forex trades.

Retail Sales 💸

The retail sales report, as the name suggests, measures total sales from all retail stores in the country. This is an excellent way to track consumer spending, and reports adjust for impacts of the seasons. Retail sales reports are often more readily available with more recent data, so they are useful between releases of the GDP and other lagging indicators. 

Consumer Price Index (CPI) 📊

The CPI will give you price changes of all consumer goods at a glance. You can then use this to compare to a nation’s exports and see whether the nation is raking in the dough or losing it steadily. 

Export prices can change pretty rapidly, so you need to keep a good eye on them. If you see that the price of a commodity is going up, and that commodity is a significant export for the nation, then it’s highly likely that their economy will strengthen as a whole—and the value of their currency will increase. 

Central Banks 🏛

Every nation has a Central Bank. In the United States, it’s the Federal Reserve Bank; in Europe, it’s the European Central Bank; in Japan, it’s the Bank of Japan; and we’ve already mentioned the Bank of England. (They don’t always come with flashy names, clearly.) 

These institutions oversee monetary policy, set economic goals such as lowering inflation or raising employment levels, issue currency, regulate credit, manage reserves, and act as the bank of the government. So when you see that China is expanding the scope of banks’ forex derivatives business, that’s the work of their central bank.

Interest Rates 📈

Speaking of central banks, interest rates can make a huge difference in exchange rates for currencies. Higher interest rates indicate optimism from the central bank, as they mean the economy is growing. If interest rates are being cut, that means the central bank is more skeptical. 

Traders will often try to anticipate what a central bank is going to do. If there is news approaching of an announcement and traders think that interest rates will increase, they might start buying that currency to get a head start on the increase in value associated with these higher rates. Then, if traders’ expectations are not met, this can lead to intense volatility in the market. 

Political News 📰

We won’t be the first to tell you that political news impacts economies. (Or at least, we hope we’re not the first ones to tell you that.) You’ll be able to see some major political news events on the horizon, like upcoming elections, or votes on economic policy or other major bills. Others will take you by surprise, such as major weather events, or… a global pandemic? 

National economies have been impacted not only by the start of the pandemic back in March 2020, but also news of developing vaccines, vaccine rollouts, the Delta variant, and more. Traders flocked to the Yen and Swiss Franc after news of a potential COVID variant resistant to vaccines, as these safe haven currencies often stand up more strongly to political turmoil. 

The Limitations of Forex Fundamental Analysis 🚧

Fundamental analysis helps you understand the building blocks of a currency and help you anticipate where it will go next. However, many traders use the forex markets more for short-term price fluctuations. This means that immediate news and technical analysis are often more helpful. Long-term positions are more common in the stock market than in forex, and fundamental analysis is a bit more useful for deciding what to do with your long-term positions. 

However, fundamental analysis can give you a heads up on when a currency might be experiencing short-term volatility that you want to capitalize on. Reading an economic calendar and tracking upcoming reports will help you predict these windows and sneak on in to capitalize on a turbulent market. 

Plus, if you understand the underlying principles of what makes a currency tick, you’ll be able to react to news items more quickly. You won’t have to look at a headline announcing an increase in interest rates, wondering what that means about the currency—you know now that that means the central bank has an optimistic view of the nation’s economy, and the currency’s relative value is likely to go up. 

If you’re a short-term forex trader, it’s likely most crucial that you master technical analysis and some of the most common indicators in forex. But if you’re looking to go deeper and understand the patterns behind your patterns, that’s where fundamental analysis can take you to the next level. 

How to Perform Forex Fundamental Analysis 👨‍🏫

So, we’ve gone through the many factors that go into a currency’s relative value. But how do you start putting this into practice? 

First, make sure you have one of the top brokers for forex trading, which will automatically set you up with many of the tools you need. It’s always a good idea to explore your brokerage platform and see what kind of updates, calendars, and news they offer as part of their regular forex services, or perhaps under their fundamental analysis program. In particular, the following advice can get you started on tracking economic indicators and making better-informed trading decisions. 

Use an Economic Calendar 📅

Keeping an economic calendar handy on your desktop can help keep you informed of upcoming reports and indicators. You want to know in advance when these are coming, since we’ve already discussed how just the anticipation of these reports can cause volatility in the market. 

There are many economic calendars available from a variety of websites. You can use your search engine to find the economic calendar that will convey the information you most need about the nations you’re most excited to track. 

Watch the Market 🕵️‍♂️

Different indicators hit the market differently. When the USD weakens, many traders will be watching inflation for an indication that things might change. 

Traders will make decisions in anticipation of a certain announcement, and it’s worthwhile to watch whether the announcement actually goes how the traders thought it would—and what happens if it doesn’t. 

Understanding the context of how these indicators are viewed in the market is just as important as understanding the indicators themselves. How is trading volume impacted before and after a major announcement? What indicators are news sources most interested in at what times? As you gain more experience, you’ll start to have your own insights on these matters. 

Pace Yourself 📘

Economies are complicated. Countries are complicated. Fundamental analysis can be a bit of a rabbit hole, as there are so many factors that impact currency values, and so many nations whose economies you might want to understand on a deeper level. 

Set priorities for yourself for what is most interesting to you and most relevant to your trading strategies: you might decide to first just focus on commodity currencies, or exotic currencies, or take a deep dive on the Euro. Whatever you choose, make sure that you set yourself reasonable goals, and then make balanced decisions about how to incorporate your findings into your trading strategy. 

Conclusion 💭

After all that reading about fundamental analysis, we bet one of your personal indicators is going off and it might be time for a snack! You’re already making a great start just by gaining the vocabulary needed to enter the world of forex fundamental analysis. Now, you can make decisions about how these tools might relate to your specific forex trading goals and strategies. 

Remember, fundamental analysis offers many insights, but it is a complicated process. Make sure you understand a variety of factors and take your time in making trading decisions. 

If you put all your eggs in one indicator basket, the currency may not really do what you expect it to—because it’s reacting to a whole host of things all at the same time. Fundamental analysis allows you to take a more holistic view of currency values, and understand how they shift over the long term. So happy trading! 

Get Started with a Forex Broker

Fees

Average spread EUR/USD standard

1

0.75

All-in cost EUR/USD - active

0.7

Variable fees

Minimum initial deposit

$100

starts from $50

General

Total currency pairs

82 (in US)

47

Demo account?

Social / copy trading?

Rating

9/10 Visit FOREX.com on FOREX.com's website

8.5/10 Visit eToro on eToro's website

Fees

Average spread EUR/USD standard

0.75

0.9

All-in cost EUR/USD - active

Variable fees

0.363

Minimum initial deposit

starts from $50

$250

General

Total currency pairs

47

93

Demo account?

Social / copy trading?

Rating

8.5/10 Visit eToro on eToro's website

9.0/10 Visit IG Group on IG Group's website

Fees

Average spread EUR/USD standard

1

0.75

0.9

All-in cost EUR/USD - active

0.7

Variable fees

0.363

Minimum initial deposit

$100

starts from $50

$250

General

Total currency pairs

82 (in US)

47

93

Demo account?

Social / copy trading?

Rating

9/10 Visit FOREX.com on FOREX.com's website

8.5/10 Visit eToro on eToro's website

9.0/10 Visit IG Group on IG Group's website

About the author

Tim Fries

LinkedIn Email

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.