Fundamental FOREX Analysis
Forex, or Foreign Exchange, is the largest financial market in the world. It is also one of the most complex markets to analyze because so many different factors impact the value of one country's currency vs. other world currencies. Fundamental analysis of the Forex market is an examination of the various factors that affect the price of currency pairs traded in this market.
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Inflation and Deflation
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Inflation and deflation are two key factors that impact the future value of a country's currency. When a currency inflates, it is devalued, which means the goods produced by that country's currency become cheaper for foreign buyers. Contrarily, deflation makes a country's goods more expensive. When a country sells more products to foreign buyers, the demand for its currency can rise, causing its value to rise against other currencies, and vice versa.
Primary Movers
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In addition to inflation and deflation, there are several other primary movers that impact Forex prices. Fundamental analysts keep a close eye on interest rates, as they can create inflation and deflation of a country's currency. Employment rate is also an important factor as high unemployment indicates a weak economy. Finally, Gross Domestic Product, or GDP, and trade balance with other countries can impact currency values both positively and negatively.
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Business Cycle
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Free market economies each have a business cycle that moves between periods of economic boom to recession. During boom periods, there is risk of inflation, so governments try to deflate the value of their currency. During recessionary periods, governments try to stimulate economic growth by printing more money, which causes inflation.
Big Events
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There are several important events fundamental analysts pay close attention to as they have the potential to greatly impact the future price value of currency. The biggest event is the Federal Reserve Committee, or Fed, meeting, which takes place each month. Following the meeting, the Fed releases meeting minutes indicating what the members plan to do with interest rates. Other important events are the government's employment report release, which takes place once a month and other government financial reports, such as the Consumer Price Index and Producer Price Index, which are released periodically.
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References
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