Fundamental Analysis alongside Technical Analysis is essential for entering financial markets. In fundamental analysis, traders can predict future market movements by understanding and analyzing economic and political factors, which can lead to significant success in financial markets. Unlike technical analysis, which focuses on price movements and patterns, fundamental analysis aims to understand the underlying forces driving currency fluctuations.

In fundamental analysis of the Forex market, many parameters such as economic reports, data, announcements, or news events are examined. By studying and analyzing these factors, traders can identify future currency price trends. Each country releases news or reports regarding its economic events daily, which have a direct impact on the relative value of its currency. Therefore, it can be said that Forex fundamental analysis is a method to examine the social, economic, and political conditions of countries, allowing traders to forecast future currency movements based on the current economic conditions.

Generally, it can be said that economic factors play a crucial role in Forex fundamental analysis, and traders must pay special attention to them. In fact, the better the economic condition of a country, the more investors are inclined to buy and trade its currency. The most important and fundamental indicators that significantly influence currency pair prices in the Forex market include:

• Gross Domestic Product (GDP)
• Unemployment Rate
• Retail Price Index
• Consumer Price Index (CPI)
• Producer Price Index
• Interest Rates

For example, a significant increase in the unemployment rate in a country indicates that the country is not in a favorable economic situation and faces problems. In such cases, the currency of that country will decline, making investment in that currency an unwise decision.

Application of Fundamental Analysis:

Traders use fundamental analysis to:

• Make Predictions: By analyzing economic reports and news, traders can forecast future currency movements.
• Identify Investment Opportunities: Understanding economic trends helps in choosing currency pairs that are likely to appreciate or depreciate.
• Manage Risk: Awareness of economic conditions can help traders avoid positions that are likely to be affected by adverse developments.

Tools Needed for Forex Fundamental Analysis

Traders must first become familiar with the necessary tools for fundamental analysis when analyzing currency pairs in the Forex market. Therefore, after getting acquainted with the fundamental analysis tools, investors should develop their own trading strategies and then proceed to buy and sell currency pairs.

Economic News
The first and simplest tool for fundamental analysis in the Forex market is the economic news related to various countries. Economic news and events from each country are usually published in the Forex economic calendar at specific times, whether daily, weekly, or monthly. As a result, traders can closely examine a country’s economic conditions by following this news.

It’s important to note that for this analytical method, it is not necessary to review all economic indicators; investors only need to focus on those that affect prices in the Forex market. Interest rates are among the critical factors for fundamental analysis in the Forex market, announced on specific dates by central banks, allowing investors to conduct their analyses based on the declared interest rates. In fact, a high-interest rate leads to an increase in the value of a country’s currency, while lower interest rates decrease its value.

Additionally, since in developed countries the trend of indicator changes occurs gradually over a specified period, investors can develop a systematic understanding of each important indicator.

Evaluating the Strength of National Currencies

Another significant and influential indicator in Forex fundamental analysis is evaluating the strength of national currencies. Various methods and strategies exist for this purpose, which we will introduce below.

• Investors can use technical analysis and examine each country’s currency symbol on trading platforms to determine the increase or decrease in its strength.
• Assessing import and export conditions and analyzing changes compared to previous years is one of the influential factors in determining a country’s currency strength.
• Another method for determining national currency strength is analyzing essential commodities related to each country. For example, China is the world’s largest gold producer; therefore, its economy is dependent on gold, and fluctuations in global gold prices can impact China’s economy.

Political Factors and War Events

Forex traders must always pay attention to political factors affecting the Forex market, such as national elections and referendums, and predict their impact on the Forex market. For example, following Britain’s exit from the European Union (Brexit referendum) in 2016, the British pound experienced a significant drop.

War events are also among the other influential factors in fundamental analysis, significantly impacting the economy and currency value of the countries involved. For instance, during the Ukraine-Russia war, Europe’s economy was severely affected, leading to significant drops and volatility in the EUR/USD currency pair.

Stock Market Index Analysis of Countries

In the Forex market, stock market indices are among the most important analytical indicators regarding the economic status of countries. In fact, the stock index reflects the behavior of investors in response to various economic conditions within a country. Generally, it can be said that a country’s stock index has an inverse relationship with its currency strength. That is, when the value of a country’s currency declines in international trade, the corresponding stock index will likely be on the rise.

Investors can easily view stock index charts of various countries on trading platforms and conduct a thorough analysis of them. Based on this, they can also compare the currency strengths of different countries against their stock indices.

Advantages and Disadvantages of Forex Fundamental Analysis

Some investors and traders prefer to use fundamental analysis for their trades and develop their trading strategies accordingly. This analysis has its advantages and disadvantages, and understanding them can provide a better insight into fundamental analysis.

Advantages of Forex Fundamental Analysis:

• Optimizing trades with a deep and accurate understanding of countries’ economic conditions.
• Identifying the best currency pairs for investment.
• Preventing investors from entering erroneous trades.
• Evaluating and analyzing the behavior of Forex market participants.
• Examining factors influencing currency pair price changes.

Disadvantages of Forex Fundamental Analysis:

• Fundamental analysis is a complex and time-consuming process, as investors must consider numerous factors to accurately understand the Forex market.
• Fundamental analysis is not applicable for short-term trades.
• Economic data can be manipulated in some countries.

In summary, the advantages of this analytical method significantly outweigh its disadvantages. Therefore, traders considering these factors can achieve substantial success in the Forex market.

Key Components of Fundamental Analysis in Forex:

1. Economic Indicators:

1. • Gross Domestic Product (GDP): Measures the economic output of a country. Higher GDP growth usually strengthens the currency.
   • Employment Data: Includes metrics like the unemployment rate and non-farm payrolls. Strong employment figures can indicate a robust economy and positively impact the currency.
   • Inflation Rates: Indicators such as the Consumer Price Index (CPI) and Producer Price Index (PPI) help assess inflation levels. Central banks often adjust interest rates based on inflation trends.

2. Interest Rates:

1. • Set by central banks, interest rates are a crucial determinant of currency strength. Higher interest rates typically attract foreign capital, boosting demand for the currency.

3. Political Stability and Economic Policies:

1. • Political events such as elections, government stability, and policy changes can significantly impact currency values. Uncertainty can lead to volatility.

4. News Releases:

1. • Economic news, such as trade balances, retail sales, and manufacturing indexes, can create immediate reactions in the Forex market. Traders monitor economic calendars to stay informed.

5. Market Sentiment:

1. • The overall sentiment of investors regarding the economic outlook can influence currency movements. Positive sentiment may lead to currency appreciation, while negative sentiment can have the opposite effect.

6. Geopolitical Events:

1. • Events such as wars, natural disasters, or international disputes can impact currencies. For example, conflict in a region may weaken the local currency due to instability.