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Fundamental Analysis of Forex Pairs
Forex traders have two means of predicting changes in Forex currency rates, fundamental analysis of Forex pairs and technical analysis of the same.
Fundamental analysis of Forex pairs revolves around the news of the day, politics, monetary policy, balances of trade, and both pronouncements and actions of central banks.
Technical analysis of Forex pairs has to do with assessing and predicting changes in market sentiment. While technical analysis can give traders an advantage in short term trading, the fundamentals are what drive currency prices over the long term.
How to trade Forex successfully is typically to use fundamental analysis of Forex pairs to gain a sense of the market possibility and technical analysis to spot short term opportunity.
Fundamentals Have to Do With Both Currencies of a Forex Pair
Forex markets were set up to allow for payment of world trade.
A German company makes a product and sells it to a company in India.
The Indian company needs to convert Rupees to Euros in order to pay.
The Indian company may well purchase options on the Euro with the Rupee in order to hedge currency risk.
What is of importance to the company in India regarding fundamental analysis of Forex pairs are only the Euro and the Rupee.
How to trade Forex successfully in this case is to be aware of the fundamentals that drive the Euro, monetary policy in India, and factors relating to the strength of the related economies.
Importance of Fundamentals for Hedging Currency Risk
When a company is interested in hedging currency risk it is less interested in Forex technical strategies and more interested in fundamental analysis of Forex pairs.
This is usually because a company is trying to anticipate the relative strengths of two currencies six months, a year, or longer in advance.
What are more important in the medium and longer terms are assessment of employment rates, monetary policy, balance of payments, and other factors useful for understanding the long term strengths of one currency versus another.
The Use of Fundamental Analysis of Forex Pairs in Currency Speculation
Currency speculators are often day traders or traders who use technical analysis of trends and reversals to make short term profits from market volatility.
Once a day trader is in the midst of a trade his focus is primarily on technically driven market fluctuation.
But, how does he pick which currency pair to trade?
What is his sense of the range of prices in which a currency pair may trade?
Where will the currency pair be a year from now?
Fundamental analysis of Forex pairs helps the currency speculator anticipate volatility.
Fundamental analysis is how a trader can gain insight into the long term trends of one currency versus another.
A successful Forex trading system should always include fundamental analysis of Forex pairs.