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What is Fundamental Analysis - Definition, Types and Steps

Samuel Adamson

January 2021

Анализ ключевых событий, ситуаций и их взаимосвязь позволяют спрогнозировать возможные последствия для мировой экономики, отдельных рынков и их субъектов, а также оценить их влияние на котировки активов в кратко- и долгосрочной перспективе.

Factors affecting the currency value:

  • Economic
    It includes a number of key macroeconomic indicators and indices which are extremely important.

  • Political
    This is a series of events that could have an extremely powerful influence on the exchange rate. These can be parliamentary elections, military conflicts, interest rate changes in the world's largest banks, etc.

  • Psychological
    These aspects have a more serious influence on price trend than the previous ones.

  • Force Majeure
    — It includes various global events: wars, coups, terrorist attacks and other unforeseen events.

Main Financial Institutions

  • Federal Reserve System (FRS)
    of the United States

    Chairman of the Board of Governors of FRS – Janet L. Yellen

  • Bank of England

    The Bank of England is headed by Mark Carney

  • German Federal Bank
    (Deutsche Bundesbank)

    Headed by Jens Weidmann

  • European Central
    Bank (ECB)

    Headed by Mario Draghi

  • Bank of Japan

    Headed by Haruhiko Kuroda

  • Swiss National Bank

    Headed by Thomas Jordan

The following organizations also have a significant influence on the currency market:

  • US Treasury

  • Ministry of Finance of Germany

  • HM Treasury (Ministry of Finance of the United Kingdom)

  • Ministry of Finance of France

Economic factors affecting the Forex market

  • 1

    Economic performance of a particular country

  • 2

    Business negotiations of large companies

  • 3

    The results of the meeting of the Central Banks worldwide

  • 4

    Reforms in the Global Monetary Policy

  • 5

    Meetings of trade and economic unions, G7 heads of government

  • 6

    Statements by Heads of State and Central Banks, economists and analysts

  • 7

    The influence of markets that are pegged against a particular currency

  • 8

    Currency interventions of Central Banks

Types of Fundamental News

  • Economic calendar

  • Financial news

  • Dow Jones news

  • random/unexpected — such news often includes political and natural events. Unexpected news is the cause of a big rush in the market, which certainly leads to a sharp change in the exchange rate.

  • expected — these are the changes in the economy, which are known in advance. Before the official news release, the experts predict a change in the exchange rate.

How does the market react to news?

  • If the news are confirmed — the exchange rate will not change;

  • If the experts made the correct forecast, but did not take into account the consequences — the exchange rate will continue to move in the same direction, but the exchange rates could boost their movement;

  • If Forex market analysts made incorrect forecasts — the exchange rate will start moving in the opposite direction.

How can you use this data?

If you want to perform a fundamental analysis, you need to remember and follow certain rules:

  • 1

    Very often, the market moves immediately before the release of very important economic news, and that is why experts always recommend to use the economic calendar and always record the exact time of publication of these indicators. The economic calendar is a key instrument of fundamental analysis.

  • 2

    It is necessary to study the key indicators of the economy carefully, which are currently available. For a successful market analysis, you need to perform a market analysis according to the data obtained. After this, it is necessary to trace whether they coincide with the real market values. In the event that there is a difference between expectations and data obtained, you need to find logical explanations for this.

  • 3

    Do not immediately react to the news, because very often such data may dramatically change. In addition, it is necessary to pay close attention to the previously revised indicators, since such kind of information will allow you to catch current trends and create your own action plan in the case of the publication of similar data in the future.