Fundamental analysis in forex
Fundamental analysis asks why a currency should be worth more or less. It looks at interest rates, inflation, growth, jobs and politics, and how traders expect central banks to react to them.
- Currencies move on expectations. A good number can still push a currency down if it was expected to be better.
- Interest rate expectations are the main driver for most major pairs.
- Use fundamentals for direction and context, and technicals for timing and risk.
Currencies as a price of a country
A currency is a claim on an economy. If the outlook for that economy improves, or interest rates rise, holding its currency becomes more attractive and demand tends to rise. Fundamental analysis tries to judge those shifts before or as they happen.
Interest rates and central banks
The biggest driver for most major pairs is the gap between interest rates, and more importantly the expected path of rates. A central bank, such as the Federal Reserve (US), the European Central Bank, the Bank of England or the Bank of Japan, sets its policy rate to balance inflation and growth. Higher rates, or the prospect of higher rates, tend to support a currency, because money earns more there.
- Hawkish means leaning towards higher rates. Dovish means leaning towards lower rates.
- Markets move on the statement and press conference as much as on the rate decision itself, because the decision is usually priced in beforehand.
The data that moves prices
| Release | What it measures | Why traders care |
|---|---|---|
| Inflation (CPI) | Change in consumer prices | Hotter inflation raises the odds of higher rates. |
| Jobs (such as US Non-Farm Payrolls) | Jobs added and unemployment | Strong jobs support growth and rate expectations. |
| GDP | Size and growth of the economy | The broad health of the economy. |
| Retail sales, PMI | Spending and business activity | Early signals of where growth is heading. |
| Central bank decisions | Rates and guidance | The direct source of rate expectations. |
The high-impact calendar lists these releases in your local time with forecasts, previous figures and results.
It is the surprise that matters
Prices already contain the consensus forecast. What moves the market is the gap between the actual figure and the forecast. If inflation comes in at 3.1% when 3.4% was expected, the currency can fall even though inflation is still high. That is why reading a number as "good" or "bad" on its own is a trap. Ask: better or worse than expected, and what does it do to rate expectations?
Risk sentiment and other drivers
- Risk-on and risk-off: in calm, optimistic markets money tends to flow towards higher-yielding and commodity currencies (AUD, NZD, CAD). In stress it tends to flow into perceived havens such as the US dollar, the Swiss franc and the yen.
- Commodities: the Canadian dollar often tracks oil, and the Australian dollar often follows metals and Chinese demand.
- Politics and trade: elections, sanctions and trade disputes change the outlook and the risk premium on a currency.
- Carry: traders borrow a low-rate currency to hold a high-rate one and earn the difference, which can build trends and unwind sharply.
How to use it in practice
- Know which events are due this week and which currencies they hit.
- Form a simple view: is the central bank for this currency leaning more hawkish or dovish than the other one in the pair?
- Use the chart to choose entry and stop levels, and avoid opening new trades just before big releases unless you have planned for the volatility.
- Expect spreads to widen and prices to jump around the release.
Technical and fundamental analysis work best together: our technical analysis guide covers the chart side.
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This article is for education and is not financial advice. Rules and figures from third parties change; check them at the source. Trading leveraged products carries a high risk of loss.