What is Fundamental Analysis?

Fundamental analysts look at a country’s economic strength to inform their trading decisions. Economic news can often have a large impact on price. You can keep track of economic news released by using a Forex calendar.

Fundamental analysis uses economic data to predict moves in currencies. By interpreting economic data, you can gauge the strength of a country’s economy. For example, if Europe has a strong economy and the U.S. has a weak economy, a fundamental trader may go long. This is because the trader is expecting the Euro to rise against the Dollar.

Typically, fundamental traders will hold trades for weeks or even months. Economic factors usually don’t cause immediate spikes in a currency’s value. A great example for this is interest rates.

One of the most important economic indicators for fundamental analysis are interest rates. Countries that have high interest rates attract more foreign investments. If you had to choose between an interest rate of 0.5% or 5%, you would obviously choose the 5%.

Over longer periods of time, high interest rates case a currency’s value to rise as people invest in the currency. So if the U.S. had a 1% interest rate and Europe has a 0.05% interest rate, the U.S. dollar may rise in value against the Euro. This would mean that a fundamental trader goes short on EUR/USD.