Basics of Fundamental Analysis

There are two types of market analysis: technical and fundamental. The concept of technical analysis is described in details in one of our other articles in this series. In this article, we will expand on the notion of fundamental analysis.  

 

According to the fundamental analysis, the market is changing under political, economical, and financial factors. Therefore, the fundamental analysis evaluates information of economic, financial, and political nature that directly or indirectly influences the market behavior. In particular, it studies the principal economic indicators of the leading world economies that can have an impact on the exchange rates of major currencies. The  Gross National Product (GNP), Gross Domestic Product (GDP), the inflation rate, the unemployment rate, CPI and PPI indexes, commodity and industrial price index, trade balance, and balance of payment are the most significant indicators. 

 

The GNP is the key indicator for the national economic climate which includes such characteristics as consumption, investments, government expenditures, exports, and imports. The GNP is directly proportional to the exchange rate: a high GNP level indicates good economic condition and inflow of foreign investments, which raises the demand for the national currency. The unemployment rate demonstrates the ratio between the working and unemployed population. Ideally, this indicator should not exceed 6%. A rise in the unemployment level negatively affects the currency rate. The inflation has a similar effect on the currency rate and can be measured by the price growth rate. Consequently, the inflation and unemployment indicators are in inverse proportion. 

 

This fundamental analysis also factors in the events important for the policies of different countries: elections, economic reforms, international agreements, etc. The main financial factor is the interest rates of central banks that determine the total profitability of investments into a country’s economy. The growth of this indicator generates favorable conditions for national currency growth. Besides, the national currency rate is influenced by natural disasters, terrorist attacks, emergencies, and other force majeure situations. The fundamental analysis requires special knowledge given the difficulty of numerous indicators in different countries, so only qualified specialists can carry it out professionally.