Fundamental Analysis in Forex Trading

Posted on January 25, 2008
Filed Under Forex Education |

In Forex Trading, fundamental analysis focuses on the theoretical models of exchange rate determination such as purchasing power parity (PPP) and the theory of elasticity.

Fundamental analysis also concentrates on other major economic factors such as Gross National Product (GNP) that measures the economic performance of a nation economy. Other economic indicators include Gross Domestic Product (GDP), which refer to the sum of all goods and services produced in a country. Consumption spending, Investment and government spending are all very influential due to their sheer size and have great impact on a nation economic performance.

Inflation Indicators such as Producer price index (PPI), Consumer price index (CPI) are closely watched by traders to measure inflationary activity. For the Federal Reserve, the method of choice to flight inflation is to raise interest rates. And higher interest rates tend to support the local currency, in this case, the US dollar.

For the fundamentalists, this approach to examine all the factors will determine the real value of a currency. This is normally referred to as the intrinsic value. A fundamentalist believes that if the intrinsic value is below the current market price, there is a good opportunity to long or buy the currency. And if a currency current market price is higher than its intrinsic value, there is higher probability that the currency will falls, hence, opportunity to short or sell.

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