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Fundamental Analysis

Fundamental analysis implies a review of the basic (fundamental) indicators of the economy of a country or region, with a focus on the currency. It also includes the study of events with economic or political implications, such as GDP growth, unemployment levels, inflation levels, development of industrial production, etc. Also taken into consideration are events such as force majeure events, natural disasters, and so on. There are about 30 major macroeconomic indicators that affect the performance of exchange rates. Within the gamut of information affecting currencies are news on changes to basic interest rates and press conferences by heads of central banks. The basic interest rate is the percentage rate at which a country’s central bank lends money to commercial banks. The interest rate is the major mechanism used in regulating inflation. The higher the interest rate – the higher the interest by investors for the currency.
Such data is published at scheduled times throughout the year. Those times are disclosed in special economic calendars. Upon disclosure of this information, and depending on its nature, drastic currency leaps on the exchanges may result.

How Economic News Affect The Currency Rate

Let’s consider the effect of economic news on the currency rate by looking at an example from January 22, 2008. Let’s assume that you have prepared for a deal and plan on buying Euros, and you know that today major interest rate changes will be announced by the European Central Bank (ECB). The market has been awash with rumors and speculation that the rate may be reduced due to a slowdown of economic growth around the euro, and that assets in Euros may become less attractive for investors. That is why the euro has been falling to the dollar. But when the decision is published, it turns out that the interest rate remains at the former rate of 4%, the market sighs with relief, and the rate shoots up. The traders’ optimism is reinforced at the press conference by Jean-Claude Trichet, the ECB Head, where he says that the ECB will undertake timely measures to keep the euro’s rate stable.

On this chart you can see that the euro shot up at the time of the news, and within 5 hours the price of the euro/dollar currency pair changed by 170 points. The cost of one point in euro/dollar currency pair is 10$, hence, in 5 hours 1700$ could have been earned.
This is how a trader may use the fundamental analysis in forex trading. But that’s not all. Now we will consider an example of the so-called short-term position, where your deal lasts but a few hours. The duration of a trade operation may last a few days, or even a few weeks. And here you also use the fundamental analysis to forecast the rate’s fluctuations.

How Political News Affect The Currency Rate

Now let’s consider an example of a political event that affected the Forex market.
You will surely remember the scandal in the fall of 1998 whose central figures were the US President Bill Clinton and Monica Lewinsky. For a long time, Clinton failed to admit his relations with Lewinsky, but in late August of 1998, there was a court hearing when the President officially confirmed that Lewinsky was his lover. It shocked the American society and Clinton was under the threat of impeachment.
In that autumn, the dollar dropped substantially in relation to other currencies. For instance, the dollar lost 890 points to the Swiss franc in just two weeks.
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