Fundamental analysis is a stream of analysis where the motive of analysis is to find the true intrinsic value of the related security where technical analysis only focus on the price movement of that security and believes that the price of that security is the ultimate indicator of the health of the company or the price is a reflection of every fundamental factor.
In equities market fundamental analysis tries to find the intrinsic value of the share by analyzing all the fundamental factors which represents the health of the company and on the basis of that it tries to find the deviation in the price and value of that equity and then define whether the stock price is undervalued or overvalued. And in forex market fundamental analysis tries to find the overall health of the country by analyzing various factors like the health of the economy and the expected growth of the country economy by looking and analyzing various important economic events like interest rates and GDP figures of the country.
Economic reports and Fundamental analysis
Important economic report of major world economies leaves there marks on the Forex market. Economic reports majorly reports which is related to fiscal and monitory policy effects the movement and valuation of the related currency. Employment, inflation and trade balance reports also plays a very important role in the assessment of a countries health and in turn it helps in the valuation of the currency fundamental analysts keeping a close track on this reports and read and forecast these reports which helps them to find the true value of the currency or we can say it helps them in evaluating the economic health of that country and in turn it translates into an accurate prediction in the movement of the currency pairs.
The trade balance is a very important report which states the position of the country in terms of import and exports. Trade balance and trade deficit with different countries also reflects the trade relations between two countries which plays a very important role in both countries currency valuation. Higher imports and lower exports or a trade deficit which is considered to be bad for the concerned country and on the other higher exports and lower import translates to trade surplus which is good for the country’s economy.
A trade deficit usually puts bearish pressure on the related currency but there are few export-oriented countries who willingly keep their currency devaluated even after a huge trade surplus and a perfect example of this is the Chinese Yen. But usually, a trade deficit increases the bearish pressure on the concerned currency. On the other hand trade surplus indicates higher demand for the goods produced by that country in foreign countries which creates an elevated demand for that countries currency which pushes the value of the currency high.
Gross Domestic Product
GDP is a very important economic report and it impacts the domestic equity market as well as currency markets as it is a very important indicator of the countries economy. GDP report indicates the value of all the finished goods and services produced in that country and a positive growth in the GDP shows strength in the country’s economy and a downfall in GDP number shows slower economic growth of that country. A constant growth in the GDP numbers increases the confidence in the economy and fiscal policymakers take it as a supportive factor for an interest rate hike.
Interest Rate Decision
It is the most important economic report in terms of the relevance to the forex market as the valuation of the currency in largely depends on the interest rates offered by that country. In forex carry trades the concepts are too long the currency with a higher interest rate offering and shorting the currency with a lower interest rate offering is a thumb rule because in that way you borrow the currency by shorting it on a lower interest rate and lend it on a higher interest rate which will result in a profit.
However, in this case, the price of that currency should be constant or move with the same direction as our positions the currency we purchased should be appreciating and the currency we had sold should be dropping in that way only the profit can be maximized otherwise if the movement goes against the positions all the profits earned by the carry trade due to the interest rate can be settled off.
Fundamental analysis in forex market is as relevant as it is in equity markets, wherein equity market there are quarter reports and other news and data which tend to release time by time in forex market also there are many important economic reports which released by major economies of the world time by time which have a large impact on the valuation of the currency.
Fundamental analysis of Forex market is a very complex but useful tool which enables the analyst to predict the market movement accurately for a long period of time. But on the other hand, it requires a deep understanding of economic indicators and also it requires a keen observation which helps to assess the value of the currency by evaluating the economic health of the country with the help of various economic reports.