The Forex market is like any other market and trading and is affected by many forces, including social, economic and political. The analysis of this forces is what we call fundamental analysis, and is a method used by investors worldwide. It makes a lot of sense to think of Forex trading like trading anything else, be it apples on a market stall or currencies on the web. It works in supply and demand manner, with this being the determining factor of the price and its actions. The hardest part in all of this is working out the influences on the market.
Fundamental forces that affect the markets
We need to look at all of the different factors to see which economies are flying high and those which are falling by the wayside. To trade well, you need to have an understanding of how certain events and socioeconomic factors can influence rates of exchange. For example, a higher unemployment rate will effect a country’s monetary policy as well as their economy which, in turn, will affect the demand for the country’s currency. The healthier a country’s economy is, the more positive the outlook is for their currency and it growing in value. If it’s in good nick, more businesses will invest in the country, meaning they will need to use that country’s currency to get their hands on their desired assets.
For example, if the U.S economy is improving, it will mean that the dollar is gaining strength. This might mean that interest rates will rise in order to control inflation and growth. These higher interest rates will make financial assets much more attractive. This, in turn, has an effect on the value of the dollar, causing it to increase.
What does fundamental analysis mean in simple terms
Simply put, fundamental analysis is analyzing a currency to see what it might do by looking at the country’s strengths, weaknesses and economic outlook. In being informed over these social, economic and political factors, traders have better ideas of where and how to trade their Forex currency in order to make a profit. So every trader should be aware of the currency pair they are going to trade. Here is a list of forex brokers to put your fundamental analysis skills to the test.