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Fundamental Factors Affecting Foreign Exchange Markets

There are two basic forms of analysis used in currency markets: technical and fundamental.

Fundamental analysis looks at the economic conditions that affect the value of a currency, trying to predict both where the currency may be headed and whether it is currently fairly priced. Given that exchange rates are priced as the value of one currency against another, so too economic analysis is relative.

Technical analysis is the study of market action by using charts. The technical analyst relies on historic price movement to forecast future price targets. The technical analyst believes that the current market price reflects all market information and considers only the actual price behaviour of the market or instrument. Technical analysis is widely used amongst traders and financial professionals, and some studies suggest that its use is more widespread than is "fundamental analysis" in the foreign exchange market.

In reality, most traders use a combination of fundamentals and technical's. Fundamentals provide direction while technical provides a guide as to entry and exit levels. Often fundamental analysis is considered more medium term in nature.


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Source: LatitudeFX Limited