In the world of forex trading, the analysis process is very important. This ability is needed to predict market conditions that will later help you determine decisions during important transactions. One of the analysis methods that is often used to learn forex trading is fundamental forex analysis. Here is a more complete review of fundamental forex analysis.

What is Forex Fundamental Analysis

This fundamental forex analysis is basically a non-technical analysis method that refers to sources of information that indirectly affect currency price movements in the forex market such as the economic or socio-political conditions of a country. Unlike the methods applied to technical analysis that take information from price charts, fundamental forex analysis focuses on economic factors.

This fundamental forex analysis is also more often used for long-term analysis because it takes a long time to understand market dynamics. A trader needs time to collect several fundamental analysis indicators needed to analyze the market. Long-term analysis is also considered safer because the information obtained is much more complete and tends to form a cause-and-effect pattern that is easier to read.

Key Points of Fundamental Analysis

Before applying fundamental forex analysis, there are two important points that you must understand first, namely basic fundamentals and major fundamentals.

  • Basic Fundamentals

This basic fundamental refers to the general economic conditions in a country. You can get this information from news that is continuously published periodically. This condition can move the market even though it is only temporary because the current conditions tend to have short-term impacts.

The forex market tends to be calmer (flat currency prices and minimal trading transactions) when there is quite shocking news, such as the COVID-19 pandemic, for example. The massive spread of the virus at the beginning paralyzed the country's economic activity and caused money not to circulate smoothly. This then affected the forex market which resulted in no significant changes in currency prices and made the market calmer.

This means, this basic fundamental refers to unexpected situations. Never predicted before, such as natural disasters and pandemic conditions like the one we are currently facing. Therefore, for beginner traders, it is highly recommended to focus on news from the United States, especially regarding information on consumer indexes, inflation, and also unemployment rates. These things affect the value of the USD currency which plays a major role in global trade.

  • Big Fundamentals

The big fundamental in this forex fundamental analysis refers to big and unplanned events. It is a bit similar to the basic fundamental conditions above, but the difference is that this big fundamental condition has a significant influence on unexpected price movements in the forex market, whether the currency price will increase sharply or decrease sharply. Getting information related to this big fundamental condition tends to be more difficult.

An example is subprime mortgages or housing credit in the United States. This information is clearly more difficult for an Indonesian trader to obtain. That is why traders who are limited in accessing big fundamental information will choose to rely on basic fundamental information only. But if you can access big fundamental information, then it should be optimized.

Fundamental Analysis Factors

To perform fundamental forex analysis you must refer to the factors that will be explained below. By analyzing these factors as a first step, you can detect market forces more accurately. Here are the factors.

  • Economic Factors

The condition of a country's economic strength can be seen from the economic data reports that are routinely published by the financial institutions of that country. This economic condition will influence the country in making a policy. This policy will affect the strengthening or weakening of the currency. This report is what you can rely on when trading.

  • Social and Political Factors

Although its influence is not so significant, in fact, this socio-political factor still needs to be considered by traders. Socio-political turmoil or problems at certain moments can affect currency price movements, for example, the political turmoil in Indonesia in 1998 which caused exchange rate fluctuations to be very high.

  • External Factors

In addition to the two factors above, external factors also influence the method or way of analyzing forex fundamentals. This factor refers to environmental issues, health, and other factors besides economic and socio-political factors. An example is the COVID-19 pandemic that is currently happening causing the economy in various countries to weaken.

Fundamental Analysis Indicators

In addition to paying attention to the factors that influence fundamental forex analysis, you should also pay attention to indicators when conducting fundamental forex analysis, especially economic data indicators that have an influence on the strengthening and weakening of the currencies below.

  • Interest Rate Level

The interest rate is a major change in the level of interbank deposit interest rates. The interest rate and inflation rate can affect the condition of the forex market. When inflation increases, the country's central bank must increase interest rates to suppress the rate of consumption that occurs.

As a result, there is less money in circulation because the public tends to hold their money in the bank. With less money in circulation, the value of the currency will slowly increase. This is the purpose of the central bank increasing interest rates, namely to strengthen the value of the country's currency.

  • Gross Domestic Product

Gross Domestic Product (GDP), or what you often know as total state income, is economic data that plays an important role in identifying the total value of production generated by a country, both production that takes place individually, local companies, and foreign companies. GDP can be seen from the level of state investment, state spending, consumption, and total net exports made.

  • Cost of living index

This indicator measures the cost of living and the average rate of price shifts from consumers for certain services or goods. This cost of living index data is important so that the country can know the level of inflation which will later affect the amount of bonds and interest rates. When this index increases, inflation also increases. This ultimately makes the country have to suppress the bond rate and then increase interest rates as explained above.

  • Non-farm Payroll

This non-farm payroll refers to the United States economic data, namely the salary data of employees or workers who do not work in the agricultural sector which is then considered a contributor to GDP. If salaries outside the agricultural sector continue to rise, the currency will strengthen.

  • Unemployment Rate

This indicator shows how many job seekers are still unemployed. The unemployment rate in a country is an indication of the health of the country's economy. When the unemployment rate increases, it means that the country's economic growth rate is slow and has an impact on the weakening currency. Conversely, when unemployment decreases, economic growth increases so that the currency strengthens.

  • Consumer Confidence Index

The last fundamental forex analysis indicator is the consumer confidence index. Data that shows how confident consumers are about the country's economic conditions, as well as the health of the country's financial conditions. When consumer confidence increases, the currency will also strengthen.

By knowing the important points, factors, and indicators in fundamental forex analysis, it means that you are ready to start the overall analysis process of forex market conditions before trading. Complete the required indicators to get more optimal analysis results.

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