You can use fundamental analysis to assess the intrinsic value of a financial asset to make investment decisions. Fundamental analysis aims to identify assets that are under-or over-valued to profit from price movements.
Several factors can be considered when conducting fundamental analysis, but some of the most important include economic indicators, politics, and central bank policy.
Identify the factors that will affect currency values
The first step in using fundamental analysis to trade forex is identifying the factors likely to impact currency values. You can do it by monitoring economic indicators, political developments, and central bank policy.
Forex traders’ most important economic indicators include inflation, GDP growth, and interest rates. These indicators can indicate the health of a country’s economy, which can, in turn, have an impact on its currency.
Have a look at the forex market to determine which currency you want to trade with.
Use economic indicators to assess currency values
Economic indicators are one of the most important things to consider when conducting fundamental analysis. These can indicate a country’s economic health, which can, in turn, impact its currency.
Inflation is a measure of how much prices are rising over time. If inflation is high, this can lead to a depreciation in the value of a currency as investors seek to invest in assets that will hold their value better over time.
GDP growth measures how quickly a country’s economy is growing. If a country’s GDP proliferates, it can lead to an appreciation in its currency as investors seek to invest in its economy.
Interest rates are the rate at which a central bank lends money to commercial banks. If interest rates are high, this can lead to a depreciation in the value of a currency as investors seek to invest in assets that will offer higher returns.
Analyze political developments
Politics can also have a significant impact on currency values. For example, uncertainty about a country’s future political direction could lead to investors selling off its currency.
Some political developments forex traders should keep an eye on include elections, referendums, and changes in government.
Elections can have a significant impact on currency values. For example, if a country is due to hold an election and there is uncertainty about the result, this could lead to investors selling off its currency.
Referendums can also have a significant impact on currency values. For example, if a country is due to hold a referendum on whether to leave the European Union, this could lead to investors selling off its currency.
Changes in government can also have an impact on currency values. For example, suppose a new government is elected with plans to introduce policies that are bad for the economy. In that case, this could lead to investors selling off its currency.
Monitor central bank policy
Central bank policy is another crucial factor to consider. Central banks can influence currency values through interest rate changes and quantitative easing.
Interest rate changes are one of the essential things for forex traders to monitor. If a central bank raises interest rates, this can lead to an appreciation in the value of its currency as investors seek to invest in assets that will offer higher returns.
Quantitative easing is another policy tool that central banks can use to influence currency values. It involves injecting money into the economy to boost growth. If a central bank implements quantitative easing, this could lead to a depreciation in the value of its currency as investors seek to invest in other currencies that will offer higher returns.
Look at sector-specific news
In addition to looking at general economic indicators, it is also essential to look at sector-specific news. It can indicate how different sectors of the economy are performing, which can, in turn, impact currency values.
For example, if the manufacturing sector is doing well, this could lead to an appreciation in the value of a country’s currency as investors seek to invest in its economy. Conversely, if the manufacturing sector is struggling, this could lead to a depreciation in the value of a country’s currency.
