What Is Fundamental Analysis?

The core idea

A currency is a claim on an economy. Money flows towards economies that pay more interest, grow faster, and are safer, and away from those that do not. Fundamental analysis tries to judge those flows before the market has fully priced them, or at least to understand a move once it is under way. For a retail trader that mostly means knowing what the central banks are doing and what the scheduled data is likely to change.

The main drivers

• Monetary policy: interest rates and the guidance central banks give about them. The dominant driver.
• Inflation: what it is doing and what it makes central banks do.
• Growth and employment: GDP, jobs, business surveys.
• Trade and capital flows: current account balances, investment flows.
• Politics and risk: elections, crises, and the market's appetite for risk.
• Commodities: for currencies such as the Australian and Canadian dollars, the price of what the country sells.

Macro versus micro

Equity analysts study companies; forex analysts study countries. There are no earnings reports, only the flow of economic statistics and central bank communication. That makes the data calendar the fundamental trader's central document, and Course 7 spends several lessons on reading it.

With technicals

A fundamental view says the dollar should strengthen over the coming months because the Federal Reserve is raising rates. It does not say the dollar will rise today. A technical setup says price is at support in an uptrend. Together they say: buy the dollar here, with a stop below support, because the setup aligns with the story. Most consistently profitable discretionary traders use both in some ratio.

Key takeaways

• Fundamentals are the economic forces that decide a currency's value.
• Monetary policy leads; inflation, growth, employment, flows, politics and commodities follow.
• The data calendar is the central document.
• Fundamentals give direction; technicals give timing.