Principles of Fundamental Analysis

What is a fundamental analysis?

Fundamental analysis of the market is a detailed study of the factors affecting the economy. This method allows you to predict the overall price trend. This is done through the analysis of a set of key economic and social factors as well as the current state policy. Using the Forex market instruments enables traders to make rational conclusions and make decisions in a short time.

Factors affecting the currency value:

  1. Economic. It includes a number of key macroeconomic indicators and indices which are extremely important.
  2. 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.
  3. Psychological. These aspects have a more serious influence on price trend than the previous ones.
  4. 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

European Central Bank (ECB)

Headed by Mario Draghi

Bank of England (BOE)

The Bank of England is headed by Mark Carney

Bank of Japan (BOJ)

Headed by Haruhiko Kuroda

German Federal Bank (Deutsche Bundesbank)

Headed by Jens Weidmann

Swiss National Bank (SNB)

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

Economic performance of a particular country

Business negotiations of large companies

The results of the meeting of the Central Banks worldwide

Reforms in the Global Monetary Policy

Meetings of trade and economic unions, G7 heads of government

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

The influence of markets that are pegged against a particular currency

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.