What fundamental analysis looks at
Fundamental analysis studies the economic, financial and political conditions that affect the value of a currency or asset. In the currency market, this usually means comparing two economies in terms of interest rates, inflation, growth and employment. The aim is less to predict short-term prices than to understand the background to their moves.
Central banks and interest rates
Central banks influence the cost of money by setting the policy rate. Changes in interest rate expectations are one of the main drivers of how currencies move against each other. That is why rate decisions and the statements that accompany them are followed closely.
Inflation, growth and employment
Inflation data such as the consumer price index shape expectations about what central banks may do next. Gross domestic product shows how fast an economy is growing, and employment data show the state of the labour market. These figures are released on a regular schedule and can be followed on an economic calendar.
Expectation versus outcome
Markets react less to a published figure itself than to how it differs from expectations. A figure close to expectations may cause only a limited move, while one that differs clearly from them can trigger sudden price moves. The same figure can also draw different reactions depending on what the market is focused on at the time.
The market around releases
Around major releases, spreads can widen and gaps and slippage can occur. Orders can be filled at levels different from the expected price. Knowing these periods helps you see when open positions carry more risk.
Example: the gap to expectations
Suppose, hypothetically, the market expects an inflation figure of 3.0% and the published figure is 3.5%. What often drives the price reaction is not the 3.5 itself but the 0.5 point deviation from expectations. The numbers are for illustration only; the direction and size of a real reaction cannot be known in advance.
Around news, prices can move very fast and in unexpected directions. Trading leveraged products carries a high level of risk, and you can lose all of the money you deposit.
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