Lesson 9: Fundamental Analysis in Forex
When a forecast is made of the future price movement based on the overall
state of the economy and taking into account various factors such as interest rates,
employment, housing, production and manufacturing, This is known as Fundamental
Fundamental analysts believe that the market may misprice currency in the
short run but that eventually, the correct price will be reached. They may set out to
profit by purchasing a mispriced currency and then wait for the market to recognize
its mistake, at which point, they re-price the currency.
In theory, if a country’s future economic outlook is good, its currency should
get stronger. So why is that?
If a country's economy is improving there may be a need to raise interest
rates, control growth, and inflation. Higher interest rates can attract foreign
investors looking to buy the country's financial assets.
In order to do that, they first need to purchase this country’s currency - and
higher demand means higher prices. So the value of this currency increases.
In August of 2013, the exchange rate for Pound/Dollar was around 1.53. The
bank of England indicated that because of the unsustainable inflation levels, it might
need to increase interest rates in 2015. Only 8 months later, the exchange rate had
rocketed to 1.96 - a head-spinning increase of 1600 pips.