How Fundamental Analysis In Forex Affects Market Predictions?
Fundamental Analysis in Forex is one of the most common analysis methods in the forex market, which aims to make a profit from the value changes of exchange rates. Some analysis methods are frequently used in almost all investment models and markets.
There are two main types of analysis in the forex market: fundamental and technical analysis. Thanks to Fundamental Analysis in Forex“, investors can predict the possible movements of currency pairs and the tendencies of trends.
Although it is not always possible to make a 100% accurate prediction, investors can make a profit in their portfolios thanks to the high level of accuracy.
In this type of analysis, economic data, geopolitical developments, political crises, and macroeconomic data such as interest rates announced by the central bank are analyzed.
In the light of this data, future fluctuations in the market are predicted and investment strategies are implemented accordingly.
How Fundamental Analysis In Forex Impacts Currency Valuation?
The functioning of the forex market is completely shaped by the expectations of the participants. Expectation is the basic component of the forex market and the determination of the value of all currency pairs depends on it.
If a country presents growth data, it would not be wrong to expect that the currency of that country will strengthen. At this point, investors follow the data that a country will follow its growth with the help of “Fundamental Analysis in Forex solutions.
It is easier for forex investors to predict the direction of their markets in this way. In this type of analysis, which is usually supported by some common economic indicators, investors can make more rational decisions instead of emotional reactions, which is very important for their financial stability.
Fundamental Analysis in Forex is the analysis of the data required to get an idea about the real value of a currency. When inflation rates increase in the US, all participants in the market expect the FED to determine a strategy regarding interest rates.
The FED usually increases interest rates in market periods with high inflation. This expectation is established with Fundamental Analysis in Forex and investors manage their investments accordingly, predicting that the dollar will gain value shortly.
In light of economic signals like in this example, it is possible to make a highly accurate prediction about the future trend of the currency pair being followed.
When the European Central Bank (ECB) implements expansionary monetary policies, the EURO, the valid currency in Europe, is directly affected by these policies.
Forex investors predict the short-term change of the EUR/USD parity based on the policies implemented by the ECB. Therefore, “Fundamental Analysis in Forex” is not an analysis type independent of political developments and economic indicators.
Key Economic Indicators Used In Fundamental Analysis In Forex
In the Fundamental Analysis in Forex process, this analysis method needs to use some data in order to obtain the most accurate results for investors. These data evaluated and taken into consideration in the fundamental analysis type are called economic indicators.
The most common economic indicator is the Gross Domestic Product. Thanks to this economic indicator, which presents the economic size data of a country, forex investors can benefit from fundamental analysis methods.
For example, if a country’s gross national product tends to increase, it would not be wrong to expect that the value of that country’s local currency will also increase.
Therefore, it would be a good strategy to be interested in the currency pairs in which that currency is located and to buy them when their value is low.
Other common economic indicators can be listed as follows:
– Employment rates
– Inflation rates
– Interest rates
– Current Account Deficit
For example, the employment data announced by the USA is quite decisive for participants in the markets.
On the other hand, no matter which country you are in, the policies and interest rates announced by the central banks of the world’s economic giants directly cause the value of currency pairs to change.
Therefore, investors who want to manage profitable investment portfolios should follow the reactions of central banks in addition to political developments.
Unlike technical analysis methods, fundamental analysis in forex trading is the examination of larger data with a longer-term perspective.
This makes it a more suitable type of analysis for investors who want to protect their large amounts of assets with long-term financial planning rather than investors who are accustomed to quick buy-sell transactions aimed at short-term profit returns.
Comparing Technical Vs Fundamental Analysis In Forex Trading
There are basically 2 different types of analysis not only in forex markets but also in other investment models. One of these is fundamental analysis while the other is technical analysis methods. Both types of analysis are used by forex investors in different conditions of the market.
If we compare fundamental analysis and technical analysis, it can be claimed that the most decisive difference is the determination of long-term trends in Fundamental Analysis in Forex. On the other hand, in this type of analysis, the profitability rate will generally be lower in short-term estimates.
However, providing a macro perspective is better for forex investors in terms of financial literacy. In other words, if an investor uses more fundamental analysis tools than technical analysis methods, he wants to protect his assets safely in the long term rather than making a profit in a short time.
Another difference between Fundamental Analysis in Forex and technical analysis methods is that it is unfortunately not a suitable analysis method for making quick decisions. Many forex investors try to make quick profits by making quicker decisions thanks to technical analysis solutions.
However, macro effects are ignored in this process. In fundamental analysis tools, instead of obtaining instant returns, investors expect medium and long-term profitability by predicting the trend of the market and the direction of the trends with a higher accuracy rate.
Role Of Central Bank Policies In Fundamental Analysis In Forex
Since one of the data taken into consideration in the “Fundamental Analysis in Forex” process is the central bank decisions, it is possible to say that the importance of central banks for fundamental analysis is very high.
The most determining factors for fundamental analysis among the participants in today’s modern economic ecosystem are the policies of central banks.
Central banks are responsible for determining the ideal interest rates in order to keep the value of the local currency strong in order to balance the announced inflation rates.
From time to time, interest rates may decrease or increase in some countries, and monetary expansion or contraction policies are presented to the public.
One of the best examples of this issue may be the pandemic process in 2020. At the beginning of the pandemic process, the FED increased the market pressure on the USD by offering an interest rate close to 0.
When a forex investor evaluates this development from a fundamental analysis perspective, it is possible to predict that the dollar will be worthless for a while.
As can be understood from this example, central banks directly affect currency pairs and therefore the forex market. For this reason, it may be a good strategy for professional forex investors to follow geopolitical developments, political crises, and central bank decisions.
How To Interpret Economic Data For Fundamental Analysis In Forex?
In the Fundamental Analysis in Forex process, unlike other analysis methods, investors analyze some economic data. So how are economic data interpreted in this process? An investor perspective that is not only dependent on numbers but also includes expectations is usually developed.
If better data is collected compared to expectations in any exchange rate, this currency generally gains value in the medium and long term. If the opposite happens, the currency gradually weakens. However, forex investors can prepare portfolios where they can make a profit for both scenarios.
A decrease in the value of an exchange rate does not mean that the value of forex investors’ assets will decrease. If an investor in a market examines economic data through fundamental analysis solutions that there will be a decrease in value, this shows that their next moves will be profitable.
If political developments or economic data regarding a monitored exchange rate are the same as expectations, there will be a neutral effect, and no change or fluctuation in value is expected. This can be a good move not to make a profit but to protect the value of assets.
For example, if the UK growth rate is expected to be 0.3% but is announced as 0.1%, this will create negative pressure on the GBP and change the value of currency pairs that forex investors are interested in, such as USD/GBP.
Benefits Of Using Fundamental Analysis In Forex Forecasting
Fundamental Analysis in Forex includes many real benefits for all investors. If a forex investor uses fundamental analysis solutions that are maintained with the help of economic indicators in addition to technical analysis tools in their investment portfolio, they can safely protect their assets in the medium and long term while also signing profitable transactions.
One of the most important benefits of fundamental analysis methods is that they are not independent of macroeconomic reality.
You are constantly informed about the periodic macroeconomic data provided by the country you live in or the countries that have a decisive power in the global economy. This turns you into a more conscious investor in terms of financial literacy.
In addition, fundamental analysis tools are better than technical analysis tools in terms of risk management. Risk management is carried out with fewer errors in fundamental analysis methods that include long-term return targets.
Generally, portfolio managers or investors who manage large amounts of assets maintain their success in risk management by managing their investments with fundamental analysis methods.
Risks Of Relying Only On Fundamental Analysis In Forex Markets
Although fundamental analysis methods offer many long-term benefits for forex investors, it should not be forgotten that there are also some risks. Moreover, if an investor manages his investment portfolio with only one fundamental analysis method, it may be impossible to avoid sad results.
Although it is a safe and long-term type of analysis, it is not a good decision to manage portfolios only with fundamental analysis methods. For this reason, it is very important to evaluate fundamental analysis methods together with technical analysis tools.
Macroeconomic data cannot always be explained correctly. In some special conditions, it can be explained later than the expected schedule. In such cases, investors who use only fundamental analysis tools may have difficulty.
We know that the macroeconomic data announced by many official countries in the modern world do not match expectations.
For this reason, possible short-term speculative movements from time to time can lead to risky results for those who use fundamental analysis methods as the only analysis method.
The most ideal and profitable forex investment process is models where different types of analysis and economic indicators are evaluated together.
How News Events Shape Predictions Through Fundamental Analysis In Forex?
News related to political developments, geopolitical developments, political crisis news, and news related to international relations have a strong impact on fundamental analysis. As in almost every investment model, expectations come first in forex markets.
One of the biggest factors that directly shape the expectations of market participants is news. Unplanned and unexpected developments, especially natural disasters or wars, directly affect the direction of fundamental analysis.
For example, if a country is going to enter a political election period shortly, it signals that the uncertainty in the value of that country’s local currency will increase during this period.
Considering all these factors, forex investors need to follow the news in order to have more profitable investment portfolios.
Real-World Examples Of Fundamental Analysis In Forex Strategy
There are many successful applications and examples of “Fundamental Analysis in Forex” in real life. The Brexit process is one of the good examples where fundamental analysis and real life come into contact.
During this process, GBP experienced a decrease in value with the result of the referendum. If forex investors had sold their GBP before the Brexit referendum in England, they would have had a more profitable process. Another example could be the COVID-19 period.
During this process, the expectation of a global recession increased and everyone turned to the search for a haven. The value of foreign exchange rates such as USD and JPY increased during this period and caused global effects.
Tools That Help Traders Apply Fundamental Analysis In Forex
There are many auxiliary tools for the application of Fundamental Analysis in Forex. Especially with the increase in the number of digital solutions, the use of fundamental analysis methods has become easier and more practical for forex investors of all levels.
Economic calendars offered for many smartphones and computers can be good examples of these tools. Forex investors can follow periodic data release periods through economic calendars such as ForexFactory.
It may also be a good idea to follow reliable and respected news sources such as Bloomberg and Reuters. Following not only local developments but also global developments instantly improves your predictions about the market.
Social media platforms and forex trading accounts that facilitate the follow-up of central banks’ periodic statements can also be good alternatives for professional forex investors to successfully apply fundamental analysis methods in this process.
See you in the next post,
Anil UZUN