There is no simple way to predict the direction of the forex market, but traders have more resources and tools than ever before. Forex traders can use fundamental tools to predict forex movements and exchange rates using essential tools.
Identifying the fundamentals of a market involves examining all the factors that influence exchange rates, from monetary and government policies to the state of the labor market and the housing market.
According to its core principle, the fundamental analysis identifies mispriced currencies and will eventually correct themselves. This explains why fundamental analysis tends to predict longer-term price movements better than short-term strategies, although it can also be helpful for short-term plans.
Even though the list of fundamental drivers for currencies is endless and some events are unpredictable, like natural disasters, some real drivers should always factor in when analyzing currencies. They are as follows:
Economic Growth:
Gross domestic product (GDP) measures economic growth and contraction based on data that estimates whether or not the economy is growing or shrinking. Investors flock to countries with improving economies, which translates into stronger currencies as traders purchase stocks in local currency when that country’s economy improves.
Inflation:
In a country, how quickly goods and services are rising affects monetary policy, including how likely interest rates are to increase, which impacts exchange rates. You should consider two main inflation measures: retail price indexes (RPI) and consumer price indexes (CPI).
Interest Rates:
Undoubtedly, this has a significant impact on the forex market. Generally, higher interest rates cause the local currency to gain strength since it attracts investors who save or invest in other instruments to take advantage of the higher interest rates, thus making the currency more valuable.
Trade and Capital Balances:
As the forex market is international, changes in trade or money flowing into and out of countries will impact their currencies. For instance, if exports decline, a country heavily dependent on exports will see its currency fall. Traders and investors pulling money out of a country could signify changing sentiments, or vice versa, if investment flows increase.
Employment and Wages:
Employment levels directly correlate to the strength of an economy, but wages also have an equal significance. While rising employment indicates that the economy is strengthening, stagnant wages indicate sluggish disposable incomes and a decline in personal finances (or the opposite).
Geopolitics:
Additionally, developments in the political world affect the forex market besides economic data. In a country where currencies represent its country, exchange rates fluctuate by international relations, which can be affected by disturbances to the political status quo.
Bottom line
When you are just getting started with forex trading, the amount of data and tools you need to use can be overwhelming, but this is why it is even more essential that you make the most of all the resources you have at your disposal because millions of other traders around the world are likely to be using them as well.
Most forex traders are familiar with technical analysis, while everyone else can access general fundamentals such as GDP data that affect the forex market generally.
