Forex Fundamental Analysis is a widely used method of predicting price. Whilst Technical Analysis is often best suited to short time frames as well as long, Fundamental analysis is often better suited to long term trading. With Fundamental Analysis we need to understand what drives the supply and demand for a currency.
Economic Indicators
Economic Indicators are reports released by governments and central banks, they contain data that is very important for currency traders as they give a comprehensive picture of the health of a nation’s economy. The Major US Reports released are:
- Industrial Production
Looking at trends in these data releases can give a good indication of how a nation’s economy is performing in the different areas. A long term upward trend in the major data will inevitably good for a nation’s economy and may provide a case for interest rate rises.
Interest Rates
Invariably one of the biggest factors that affects the demand for a nation’s currency is the nation’s central bank rates. Currency pairs that have a big interest rate differential generally attract carry trades, which can lead to a lot of volatility. The Pound/Yen pair certain outlines this. There has been big interest rate differential between the two currencies for many years, as Japan’s economy has been struggling as we can see from the data released in the past. The British economy has been going from strength to strength in recent years, with numerous interest rate hikes. So fundamentally this pair has been very bullish. In late 2000 price was around 150. In July 2007 price broke 250. A long upward trend over many years.
