Part III. Fundamental Analysis

In this part of our Forex education, we will discuss fundamental analysis, which involves studying macroeconomic phenomena, political news, and other events in the world that influence currency exchange rates. Supporters of fundamental analysis in the currency market believe that events or news are primary factors in relation to changes in currency prices. These events set off a chain of trading operations in the Forex market, which, in turn, affect currency exchange rates. As you can see, fundamentalists have a diametrically opposite view compared to supporters of technical analysis regarding the primary source of price movement. As we recall, technical analysts believe that future price changes are solely embedded in their retrospective trends.

In order to become a guru of fundamental analysis, it may take many years of studying specialties such as "Economics," "Finance and Credit," "International Economic Relations." Naturally, the average Internet trader lacks the time and desire to invest so much time in education. Therefore, most Forex traders have only a superficial understanding of the basics of fundamental analysis. In their work in the currency market, they rely on the opinions of professional financial analysts. Analyst forecasts are published in newspapers and magazines and are discussed in financial announcements on specialized television and radio channels. Most online brokers provide their clients with access to information systems that publish fundamental information. Such systems include Reuters, Dow Jones Telerate, Bloomberg, and others.

However, despite the abundance of Forex market analysts, it is necessary for every Internet trader to understand the basics of fundamental analysis. By making an analogy, we can say that you may not understand the inner workings of a car, but you must understand the principles of operating it and know the rules of the road. Otherwise, you can cause a lot of trouble on the road. The same applies to the Forex market. Before starting to trade with real money, you must have a clear understanding of the role that fundamental analysis plays in predicting currency exchange rate changes.

As we mentioned earlier, events are the basis of fundamental analysis. Events can be classified as macroeconomic, political, natural, etc. Rumors can also be considered as events, as they can sometimes lead to significant changes in currency quotes in Forex, especially if they come from well-known and influential figures in global politics.

Events can be divided into two broad categories: expected and unexpected. The occurrence of an expected event is known in advance. Examples of such events include the release of various economic indicators or the onset of seasonal phenomena. For instance, the U.S. trade balance data is published in the second half of each month for the previous month, making it an expected event. Unexpected events can include natural disasters, political upheavals, terrorist acts, etc. Such events typically have an immediate impact on the dynamics of currency exchange rates in the affected countries. This emphasizes the importance of having good informational support when trading Forex to avoid missing out on important global events.

An interesting fact is that almost all economic indicators for a particular country are published with a delay, referring to the previous or penultimate reporting period. This means that the estimated value of an indicator can be calculated before its official release date. Typically, leading global financial analysts make forecasts for such indicators, and the Forex market adapts to the expected value by the time of their release. Therefore, if the published value does not differ from the forecasted value, the dynamics of currency exchange rates hardly change. Interesting events occur in Forex when the published value of an economic indicator significantly deviates from the forecast, especially if the deviation is in the opposite direction. In such cases, the more unpredictable the deviation, the more rapid the market reaction. It is important to understand that in financial markets, including the Forex market, what matters is not so much the actual value of the economic indicator as its deviation from the expected value.

Different fundamental news has different effects on the dynamics of currency exchange rates. News is classified in terms of its impact duration on the Forex market as either having a long-term cycle or a short-term cycle. A long-term cycle lasts from several weeks to several years and is influenced by factors related to the overall state of a country's economy, such as inflation dynamics, unemployment rates, and interest rates. Based on such news, strategic forecasts can be made regarding currency exchange rate changes for long-term investments. A short-term cycle lasts from a few minutes to several days and can be triggered by the release of less significant economic indicators or various political events.

The exchange rate of a currency and the economic condition of its country are interconnected. This relationship can be associated only with a neural network—it is so complex that it is unlikely to be captured by a single "magic" formula. The goal of fundamental analysis is to systematize this relationship, but sometimes it raises more questions than answers. The Forex market does not always behave as described in textbooks—news releases often lead to opposite reactions. We can only speak about a certain statement with a certain degree of probability. Nevertheless, having a somewhat functioning system is better than having nothing. Fundamental analysis is important in analyzing the Forex market. In conjunction with technical analysis, it gives Internet traders an undeniable advantage over other less informed participants in the currency market. Understanding the basics of macroeconomics and the functioning of financial systems in the world's largest economies is an important step towards becoming a successful Forex trader. The subsequent chapters of the Forex Arena information portal will be dedicated to the fundamental aspects of analysis

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