Fundamental Analysis: What Is It?

Fundamental analysis, also known as Fundamental Analysis, is a method used to determine the intrinsic value of any asset. It involves evaluating various issues and factors that impact the asset from within and outside, such as economics, politics, society, and more. By doing so, we can determine whether the current price of a product is undervalued or overvalued compared to its intrinsic value.

Example

For instance, suppose you want to invest in the US dollar (USD). The ongoing conflict between Russia and Ukraine, coupled with economic and political issues in Europe, and high inflation, lead investors to believe that USD is the best choice for safeguarding their assets. As a result, the value of the USD is pushed higher.

Key Factors in Fundamental Analysis

1. Economic Factors: The strength or weakness of a country’s economy directly affects the value of its currency. Unemployment rate, inflation, GDP, and other economic indicators reflect the state of the economy.
2. Interest Rates: Interest rates have a direct relationship with currency prices. When interest rates increase, the currency’s value tends to rise, and vice versa.
3. Inflation: Excessive money circulation leads to inflation, which reduces the value of the currency.
4. Unemployment Rate: High unemployment rates often indicate an economic downturn, causing a decrease in the currency’s value.
5. GDP (Gross Domestic Product): GDP measures the total value of goods and services produced within a country. An increasing GDP contributes to currency appreciation.
6. Political and Social Factors: Legal framework, military conflicts, protests, etc., directly influence the currency’s value.
7. Unexpected Events: Natural disasters, hurricanes, earthquakes, etc., are unpredictable events that can suddenly impact the market.

Tools for Fundamental Analysis in Forex

• Economic Information: Important political and economic information is usually released through financial reports, fiscal policies, monetary policies, etc.
• Economic Calendar: Provides information about policies and economic indicators of various countries, aiding in predicting future price trends.

Should You Use Fundamental Analysis in Forex?

Fundamental analysis is an accurate method but requires investors to possess knowledge and time to monitor critical economic and political factors. For novice traders, it is advisable to combine fundamental analysis with technical analysis for more effective investments.