Fundamental Analysis in Forex

Fundamental analysis involves evaluating economic, political, and financial factors to determine a currency's fair value. Unlike technical analysis (which looks at price charts), fundamental analysis looks at the broader economy.

Key Economic Indicators

GDP (Gross Domestic Product)

GDP measures the total economic output of a country. A rising GDP indicates a growing economy, which typically strengthens the currency.

Release: Quarterly

Impact: High — moves markets significantly

What to watch: Actual vs forecast vs previous

CPI (Consumer Price Index)

CPI measures inflation — the rate at which prices for goods and services rise. Central banks use CPI to set monetary policy.

Release: Monthly

Target: Most central banks aim for 2% inflation

High CPI: Leads to interest rate hikes (bullish for currency)

Low CPI: Leads to rate cuts (bearish for currency)

NFP (Non-Farm Payrolls)

The most important US economic indicator. It measures the number of jobs added (excluding farming) and is released on the first Friday of every month.

Release: Monthly (first Friday)

Impact: Very high — can cause 50-100 pip moves in minutes

What to watch: NFP number, unemployment rate, average hourly earnings

Interest Rates

Interest rates are set by central banks (Fed, ECB, BOJ, BOE) and are the most powerful driver of currency value.

Higher rates: Attract foreign investment → currency strengthens

Lower rates: Discourage investment → currency weakens

Rate decisions: Scheduled meetings with market-moving announcements

Central Bank Policies

Major central banks and their current approach:

Federal Reserve (Fed): — US Dollar. Most influential central bank globally

European Central Bank (ECB): — Euro

Bank of Japan (BOJ): — Japanese Yen

Bank of England (BOE): — British Pound

Key terms

Hawkish: Favors higher interest rates to control inflation — bullish for currency

Dovish: Favors lower interest rates to stimulate growth — bearish for currency

Quantitative Easing (QE): Central bank buys assets to inject money — bearish

Quantitative Tightening (QT): Central bank sells assets to remove money — bullish

Trading the News

How to Trade Economic Releases

1. Check the economic calendar daily (ForexFactory, Investing.com)

2. Note the expected vs previous values

3. Wait for the actual release

4. Trade in the direction of the surprise (actual better than forecast = bullish)

Risk Management for News Trading

• News events cause extreme volatility — use wider stop-losses

• Consider waiting 15-30 minutes after release for the market to settle

• Never trade news without understanding the expected outcome