LESSON 16. Fundamental analysis
Let’s now move to the fundamental analysis. If you know why the price moves in a certain direction, you can successfully predict where it will go next and open a profitable position.
Currency exchange rates are affected by a set of different factors, mainly economic: economic growth, unemployment rate, inflation, and others.
The better is the state of the country’s economy, the stronger is its currency. When making a fundamental forecast of the currency pair’s movement, compare 2 economies,
the currencies of which form the currency pair. The currency of the country with better economic fundamentals will appreciate versus the other one.
As it may be difficult to watch a vast range of economic indicators, our advice is to focus on central banks’ monetary policy.
Central banks have vast information about the country’s economy and they take these data into account while making their policy decisions.
The main thing you should watch is the central banks’ interest rate as it can determine whether or not investors will buy that currency.
If there’s a high interest rate on a currency, investors from abroad may move their money into that currency to earn interest on their investment.
Demand for this currency increases and its exchange rate goes up.
If there’s a low interest rate on that currency, investors from abroad may look elsewhere,
or investors who live in that country may be encouraged to spend their money instead of keeping it in the bank.
Demand for this currency decreases and its exchange rate goes down.
For example, on August 4, 2016, the Bank of England not only cut the interest rate,
but also announced other measures aimed at keeping the interest rates low.
GBP/USD lost more than 200 pips during the day.