Fundamental Analysis

Fundamental Analysis
Fundamental analysis involves the assessment of macroeconomic indicators, economic growth (capital and trade flows) and geopolitical risks when evaluating the value of a currency relative to another. These forces drive the supply and demand of money.
Major macroeconomic indicators include the Gross Domestic Product (GDP), interest rates, inflation, unemployment, money supply and foreign exchange reserves. Economic growth comprises capital flow and trade flow. Geopolitical issues have an impact on people’s perceptions of a country’s level of stability and of the ability of a country’s government to deal with the political issues at hand. In addition, central banks in various countries may occasionally intervene in the forex market to adjust the value of their currencies, either by increasing domestic currency supply in an attempt to lower the price or by buying their domestic currency in order to raise the price. Sometimes, instead of making physical adjustments, their interventions may come in the form of hints or threats so that the market can pay heed and obey accordingly.
The most dramatic price movements, however, occur when unexpected fundamental events happen. Such events could range from a central bank raising domestic interest rates to the outcome of a political election or even an act of war. Since the market is made up of players, and it is the players’ emotions that determine price actions, the key driver of the currency market is their expectations and perceptions surrounding the event, rather than the event itself.