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For the basics, a forex fundamental analysis is the trends, information, status, and indicators of a nation's economic health. This is generally based on absolute purchasing power parity and relative purchasing power parity. The forex fundamental analysis examines the gross domestic product (GDP), which determines the growth or recession rate of a national economy. This economic indicator is also related to personal income, consumption, and expenditure. Consumer spending includes multiple dimensions such as retail sales, automotive sales, consumer price and consumer confidence indices and so forth. The amount of money that a nation spends is related to the ability of that nation to trade goods at home and abroad. Another economic indicator is the trade balance, which is the difference between imports and exports of a nation within a timeframe. The forex fundamental analysis must also take into account the industrial sectors of a particular nation. This is who is manufacturing what products for sale to which nation. The industrial production indicator is related to durable goods orders, business inventories, and supply management. The forex fundamental analysis uses construction data as another economic indicator. This is residential unit construction, purchases, and can include mortgage rated indices. These construction factors indicate a healthy economy when homes are being purchased, which increases after a recession or depression has occurred. Thus, construction indicates a strengthening economy. There are also inflation indicators, such as the producer price index and consumer price index, which are generally used for economic analysis.
These components of the forex fundamental analysis are economic indicators which can be mathematically traced, charted, and therefore predicted. The X-factor that cannot be easily quantified and categorized but has a significant ability to control the value of foreign exchange currency markets and global currency trading is the political factors. The ability of a nation to navigate in the global political environment has direct influence on the value of a monetary unit in that nation. Furthermore, political decisions, such as changing interest rates have a direct impact on the forex fundamental analysis. Interest rates of a particular nation can control the value of the monetary unit when interest rates alter in a single nation, but do not alter in other nations that are involved in the global currency trade. So, if the U.S. raises interest rates and the UK also raises interest rates, there is little change in the forex fundamental analysis. However, if the U.S. interest rate increases, but the UK does not change their interest rate, then the dollar is stronger against the pound.
|Jennifer Mathes, Ph.D.|