What is Fundamental Analysis?
Fundamental analysis is the study of data and reports on the economic health of a country. Every country releases reports that discuss a different aspect of its economy. The different aspects of the economy include employment report , inflation, productivity, trade, and growth. Reports are released on regular intervals varying from weekly to quarterly.
Different markets will respond in different ways to each report. For example, the bond, stock, and currency markets can respond differently depending upon the data in the report, expectations from previous reports, and general economic conditions.
Why is it Important?
While each economic report is important in its own right, economic reports are not created equal. Certain reports carry more weight and have more impact than others. In the United States, most markets are generally very sensitive to the inflation and employment data. Markets may rally when these reports are released.
The actual economic figures are very important. However, many analysts believe that the market actually responds to its expectations of the economic figures. If the markets expectation was consistent with the actual figure, the market may not respond dramatically. However, if the markets expectation was significantly higher or lower than the actual figure, a market rally may ensue.
Who uses Fundamental Analysis?
Fundamental analysis is used to varying degrees by nearly every trader. However, Forex traders rely primarily on technical analysis in their currency forecasting. Still, most Forex traders will watch for the nonfarm payrolls report , which is released on the first trading day of every month.
Other traders will rely on a wide array of economic reports to determine the demand (or price movement) of a currency. Every trader decides which reports are most useful for the type of currency trades entered.
Fundamental versus Technical Analysis
An unfortunate conflict has developed between traders. Some traders believe that fundamental analysis is more important because it considers the net demand for a currency. Other traders believe that technical analysis is more important because it analyzes the price momentum of a currency pair and can accurately pinpoint the entry and exit points for a Forex trade.
A trader does not need to choose only one approach. Most experienced traders report that a combined approach to predicting the price movement of a currency pair (using both technical and fundamental analysis) provides the most accurate results.