Core Concept
Fundamental analysis means looking at the real-world factors that make currencies stronger or weaker—like a country's economy, its central bank's decisions, and major news events. You're understanding why price moves happen, not just observing them on a chart.
What is Fundamental Analysis?
Imagine you're trying to predict whether it will rain tomorrow. Instead of only looking at past weather patterns, you'd check the forecast, air pressure, and cloud formations—the forces that lead to rain. That's fundamental analysis: understanding why moves happen.
In forex, fundamental analysis means studying the economic forces that cause currency values to rise or fall: economic data releases, interest rates, employment figures, inflation, and central bank decisions. You're looking at the engine that drives price, not just the speedometer.
The Foundation: Supply and Demand for Currency
At its core, currency trading is remarkably simple: a currency's value rises when more people want to buy it than sell it, and falls when more people want to sell it than buy it. Currency is a product—just like stocks, gold, or oil—and its price is determined by supply and demand.
But what creates demand for a currency? Why would global investors, banks, and funds suddenly want to buy US dollars and sell euros? This is where fundamental analysis comes in. Every piece of economic news, every interest rate decision, every employment report affects currency demand through a logical cause-and-effect chain.
Example: If the United States announces higher interest rates, global investors can now earn more return by holding US dollars in American bonds. This creates demand—investors must buy US dollars to purchase those bonds. When millions of investors worldwide do this simultaneously, USD strengthens against other currencies. The mechanism is: higher rates → better returns → increased demand → currency appreciation.
Everything you'll learn in this course—interest rates, economic indicators, central bank policy—connects back to this simple principle: what makes international money want to flow into or out of a currency? Understanding the mechanisms behind these flows is what separates guessing from trading with conviction.
Real-World Example: When Fundamentals Move Markets
Let's look at a simple, real scenario to see how economic news affects currency prices.
The Situation
Imagine two countries: Country A and Country B. Right now, if you hold money in Country A's bank accounts, you earn 0.5% per year. If you hold money in Country B's bank accounts, you also earn 0.5% per year. There's no advantage to either currency—they're equal.
The News
Country A announces: "We're raising our interest rates. Now you'll earn 4% per year on money held in our currency."
Country B does nothing—still paying 0.5% per year.
What Happens?
Investors around the world think: "I can earn 4% in Country A or 0.5% in Country B. Obviously I want 4%!" So they start selling Country B's currency and buying Country A's currency to move their money where it earns more.
The chain reaction: Country A offers better returns → Everyone wants Country A's currency → Massive buying pressure → Country A's currency price rises
This isn't a small move. When major economies change their interest rates, currencies can move hundreds or even thousands of pips over weeks and months. The price change isn't random—it's the natural result of millions of people shifting their money to where they get better returns.
The Key Insight: This actually happened between the US dollar and other major currencies in 2022. The US raised rates while other countries didn't, and the dollar strengthened dramatically. Traders who understood why this would happen could prepare for it in advance, rather than being surprised by the price movements.
How Fundamental Traders Think
Fundamental traders don't try to predict every daily price wiggle. Instead, they develop a bias—a view on which currency should be stronger over weeks or months based on economic conditions. Their thought process looks like this:
Compare economies: Which country has the stronger economic outlook? Higher growth? Lower unemployment?
Compare central banks: Which central bank is likely to raise interest rates? Which is cutting rates?
Follow the money flow: Where will international capital want to go? Which currency offers better returns or safety?
Develop a bias: Based on these factors, should this currency pair move up or down over the coming weeks/months?
Important Mindset
Fundamental analysis gives you direction (should I be looking to buy or sell this pair?), not precise entry points. You're building a thesis about where money should flow based on economic reality, then looking for opportunities to align with that flow. This is very different from trying to predict exactly where the price will be tomorrow or next week.
Why Fundamental Analysis Matters
Even if you primarily use charts to find trading opportunities (which many successful traders do), understanding fundamentals helps you:
Avoid bad trades: Don't buy a currency when its country's economy is collapsing
Identify trends early: Spot long-term opportunities before they show up clearly on charts
Prepare for volatility: Know when major news events might cause huge price swings
Understand market reactions: Figure out why EUR/USD suddenly dropped 100 pips in 5 minutes