LESSON 16. Fundamental Analysis
There are 2 types of Forex market analysis: technical and fundamental…
Let’s now move to the fundamental analysis. If you know why
the price moves in a certain direction, you can successfully predict where it
will go next and open a profitable position.
Currency exchange rates are affected by a set of different
factors, mainly economic: economic growth, unemployment rate, inflation, and
others.
The better is the state of the country’s economy, the
stronger is its currency. When making a fundamental forecast of the currency
pair’s movement, compare 2 economies,
the currencies of which form the currency pair. The currency
of the country with better economic fundamentals will appreciate versus the
other one.
As it may be difficult to watch a vast range of economic
indicators, our advice is to focus on central banks’ monetary policy.
Central banks have vast information about the country’s
economy and they take these data into account while making their policy
decisions.
The main thing you should watch is the central banks’
interest rate as it can determine whether or not investors will buy that
currency.
If there’s a high interest rate on a currency, investors
from abroad may move their money into that currency to earn interest on their
investment.
Demand for this currency increases and its exchange rate
goes up.
If there’s a low interest rate on that currency, investors
from abroad may look elsewhere,
or investors who live in that country may be encouraged to
spend their money instead of keeping it in the bank.
Demand for this currency decreases and its exchange rate
goes down.
For example, on August 4, 2016, the Bank of England not only
cut the interest rate,
but also announced other measures aimed at keeping the
interest rates low.
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