Lesson 24: Introduction to fundamental forex analysis

The bulk of this training has so far concentrated on technical and graphical analysis. There is however an entirely different approach in the analysis of Forex: Fundamental analysis.

And even if this facet of analysis is much less easily applicable to trading, it is nevertheless necessary to have bases.

Concretely, the fundamental analysis focuses on studying the economic fundamentals of the forex , ie the economic situation of the various countries of the planet.

This is based on several factors: essentially central bank interest rates , and economic statistics .

Theoretically, if an economy is doing well, investors should be encouraged to invest in its currency, which increases its price.

Influence of central bank rates (key rates)

Central bank interest rates are the foundation of the global economy. The central bank rate is used to calculate the borrowing rate of individuals and firms, which has a great influence on the economy.

Interest rates have two inverse influences on the forex: one short-term, the other long-term

Long-term influence

If interest rates are low, credit is cheap. Companies are encouraged to invest, and households are encouraged to spend, especially if the rates are low, saving becomes less attractive. This situation is generally generating growth, and this is why central banks lower their rates during crises.

If interest rates are high, credit is more expensive and less accessible. It is therefore less profitable to invest for businesses, and household consumption is constrained. Moreover, the high remuneration of savings encourages them to save rather than to spend. This generally tends to curb growth and rising prices. This is why the central banks are increasing their rates against the risks of inflation.

Interest rates thus have an influence on the economies, and thus on the forex.

Short-term Influence

But interest rates also have a more direct influence on forex. Indeed, when the rate of a central bank is high, its currency becomes more attractive since the deposits in this currency are better remunerated.

Conversely, low rates result in low remuneration of deposits, and makes holding the currency is less interesting.

In this context, a fall in ECB rates for example will have a bearish impact on the EUR / USD at the time of the announcement, as will an increase in the Fed rate.

Conversely, a rise in ECB rates will have a bullish short-term impact on the EUR / USD, as will a fall in Fed rates.

It should also be noted that, insofar as currencies are quoted in pairs, the interest rate differential between the two currencies must be considered , with the best rate having a comparative advantage.

Higher rates in the United States than in Europe should therefore have a negative impact on the EUR / USD pair, while higher European rates would benefit the Euro and thus lead to an increase in the EUR / USD pair.

Interest rates are therefore the economic pillars of forex, the basis of the global economy.

However, rates are not changed often, so operators also rely on other data to analyze and predict currency movements. This is what we will see below.

Influence of economic statistics

Numerous economic statistics are published every day: Unemployment rate, GDP, manufacturing indices, orders to industry, consumer morale, etc., etc.

It is therefore a question of measuring all the factors having an influence on the economy. Normally, if a statistic is satisfactory, it should benefit the corresponding currency.

It should also be noted that some statistics are more influential than others. For example, weekly statistics are less important than monthly statistics, which are less important than quarterly statistics.

To find out if a statistic is influential or not, do not forget to check out our forex economic calendar. We also draw your attention to the fact that statistical publications are often the occasion for violent movements. We will therefore have to remain cautious about these figures.

The notion of consensus

The notion of consensus is paramount when attempting to predict the influence of a statistic on a currency. Indeed, several agencies carry out surveys before statistical publications, to know what economists and traders anticipate.

Thus, a very bad or very good statistic will have little influence if the consensus had anticipated it. 
Conversely, a statistic that may seem satisfactory could have a negative impact if the market had hoped even better!

How to take into account the fundamental analysis as a beginner forex trader?

It is therefore easy to understand that it may be difficult to rely on fundamental analysis to make short-term trading decisions ... However, some tips are to be deduced from these notions.

What to Remember:  Statistics and interest rates can be very influential on forex. Caution should therefore be exercised when publishing them.

Two solutions

• Either carefully avoid taking a position before a statistical publication , which we think is wiser!
• Either try to take advantage of the influence of statistics, which in our opinion is very risky!

For more information on fundamental analysis and news trading, we invite you to discover our dedicated section