Fundamental Analysis
Understand the economic forces that drive currency movements. Learn to trade based on economic data, central bank policies, and global events.
What is Fundamental Analysis?
Understanding what moves the markets
Fundamental analysis examines the economic, political, and social factors that affect currency values. While technical analysis focuses on price patterns, fundamental analysis answers the question: "Why is the price moving?" Understanding fundamentals helps you anticipate long-term trends and major market moves.
Economic Health
A country's economic performance directly impacts its currency value. Strong economies attract investment.
Monetary Policy
Central bank decisions on interest rates and money supply are the most powerful market movers.
Global Events
Political events, trade agreements, and geopolitical tensions create volatility and trading opportunities.
Key Economic Indicators
The data releases that move markets
GDP (Gross Domestic Product)
The total value of goods and services produced. Higher GDP = stronger economy = stronger currency.
💡 Above expectations = Bullish for currency, Below = Bearish
NFP (Non-Farm Payrolls)
Number of jobs added/lost in the US economy. The most important monthly data release.
💡 Strong jobs = Fed hawkish = USD bullish
CPI (Consumer Price Index)
Measures inflation by tracking price changes. Central banks obsess over this number.
💡 High inflation = rate hikes expected = currency bullish
Interest Rate Decisions
Central bank rate decisions. Higher rates attract foreign investment seeking better returns.
💡 Rate hike = Bullish, Rate cut = Bearish
Retail Sales
Consumer spending indicator. Strong retail sales signal economic confidence.
💡 Above forecast = Economic strength = Bullish
PMI (Purchasing Managers Index)
Business sentiment survey. Above 50 = expansion, Below 50 = contraction.
💡 Above 50 = Bullish sentiment, Below 50 = Bearish
Central Bank Playbook
The most powerful market movers
Federal Reserve (The Fed)
USDThe world's most influential central bank. Fed decisions impact all global markets.
🗓️ FOMC meetings (8x/year)
European Central Bank (ECB)
EURSets monetary policy for 20 countries. Major influence on global rates.
🗓️ Governing Council (6 weeks)
Bank of England (BoE)
GBPOne of the oldest central banks. Known for clear forward guidance.
🗓️ MPC meetings (8x/year)
Bank of Japan (BoJ)
JPYPioneer of unconventional monetary policy. Key for carry trades.
🗓️ Policy meetings (8x/year)
Market Drivers & Correlations
Risk-On Sentiment
When investors feel confident, they seek higher returns in riskier assets.
Strong: AUD, NZD, CAD | Weak: JPY, CHF, USD
Risk-Off Sentiment
When fear dominates, capital flows to safe-haven assets.
Strong: JPY, CHF, USD | Weak: AUD, NZD, EM currencies
Commodity-Currency Correlations
| Commodity | Currency | Correlation | Explanation |
|---|---|---|---|
| Gold | USD | Inverse | Gold rises when USD weakens (safe haven competition) |
| Oil | CAD | Positive | Canada is a major oil exporter |
| Oil | NOK | Positive | Norway is heavily dependent on oil exports |
| Iron Ore | AUD | Positive | Australia is the largest iron ore exporter |
Trading the Economic Calendar
A step-by-step approach to news trading
Before the News
15-30 mins prior
- •Check consensus expectations
- •Identify support/resistance levels
- •Calculate position size
- •Decide: trade or stay out?
During the News
Release time
- •Avoid entering during first seconds
- •Watch for price spikes
- •Note the actual vs expected numbers
- •Be prepared for whipsaws
After the News
15-60 mins after
- •Wait for dust to settle
- •Look for clear direction
- •Trade with the trend
- •Use wider stops initially
Real-World Trading Scenarios
Hawkish Fed Pivot
Scenario
Fed signals more rate hikes than expected due to persistent inflation.
Market Reaction
USD rallies against most currencies, especially funding currencies like JPY.
Possible Trade
Long USD/JPY, Short EUR/USD
Weak Employment Data
Scenario
NFP comes in significantly below expectations, unemployment rises.
Market Reaction
USD weakens as markets price in rate cuts, safe havens benefit.
Possible Trade
Long EUR/USD, Long Gold
Fundamental Analysis Best Practices
Do This
- ✓Use an economic calendar daily
- ✓Know the consensus before releases
- ✓Understand central bank language (hawkish/dovish)
- ✓Combine with technical analysis
- ✓Follow key central bank officials
- ✓Track market correlations
Avoid This
- ✗Trade during high-impact news without experience
- ✗Ignore the bigger economic picture
- ✗Rely on a single economic indicator
- ✗Trade against the fundamental trend
- ✗Forget about position sizing during volatility
- ✗Assume markets will react logically
Complete Your Trading Education
Combine fundamental analysis with technical analysis and master your trading psychology.