Fundamental analysis is the study of the overall economic, financial, political and other factors that represent and quantify the economy in question and can influence a financial instrument. These macroeconomic and economic health elements of a country help traders to determine future movements in a financial market.
Each day, many economic and political announcements are released that can have a direct impact on the markets, including the forex market. Therefore, it is important that traders understand how to interpret this information and convert it into an educated and successful trade.
Economic Policies in Individual Countries
Economic policies refer to how a country governs trade, budget and currency distribution. This is why budget readings in parliaments across the world are important to individuals looking to invest in the country's currency. If the budget is well balanced, promoting trade and improved economic status, then the currency's value should increase. If for any reason the distribution of wealth and economic policies reflected in the budget is less than satisfactory, the currency suffers.
Deficits and Surpluses
Countries with the strongest currencies in the forex market are those with fewer deficits, meaning that they are in a good position to trade and even lend to other countries.
Trade Trends and Levels
If a country is very active in trade, then there should be a great demand for its currency, which therefore affects all the currency pairs associated with it. A high amount of trade also indicates the competitiveness of the market, not just for currency, but for commodities and stocks as well. Economic events affecting trade trends involve supply and demand in global trade.
Inflation reduces the value of a currency and the rate of inflation should be reasonable since it occurs in every country.