| Updated: October 23, 2025Fundamental Analysis
In this lesson you will learn about the following concepts
- What is fundamental analysis?
- Types of analysis
- Why use fundamental analysis?
- What does it include?
- Market expectations
- and more…
What is fundamental analysis?
Fundamental analysis is the study of the underlying elements that impact the economy. It is a methodology whose objective is to forecast future price action and market trends by examining economic indicators, government and central bank policies, societal factors and other force majeure events such as war and natural disasters.
If we imagine for a moment that the financial markets are a clock, the fundamental indicators (fundamentals) represent the gears and springs needed to move the clock’s hands across its face. Anyone walking down the boulevard and looking at the clock can tell you the exact current time, but it is the fundamentalist who can explain how it came to be that time. Moreover, he or she will be able to tell you what time – or, more precisely, what the price – is likely to be at some point in the future.
Types of analysis
In the world of financial markets, there is a tendency for all traders to be classified into two distinct schools of market analysis – fundamental and technical. It is very common that the first question you face after telling someone that you trade in the financial markets is, “Do you belong to the group of technicians or to the group of fundamentalists?”
However, practice has shown that it is quite difficult for any trader to define themselves as a pure technician or a pure fundamentalist. Fundamental traders increasingly need to keep track of a variety of signals derived from mere price action, while, at the same time, few technicians are able to completely ignore economic reports, political decisions or social issues of utmost importance, which usually have the potential to cause huge price fluctuations.
Given that the financial analysis of any country or transnational industry examines a huge number of social, political and economic factors, viewing the entire, highly complicated and interconnected fundamental picture can be a formidable challenge.
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Why use fundamental analysis?
Fundamental analysis is a very efficient method for projecting overall economic conditions, but it is by no means precise when it comes to market prices. For instance, when looking at preliminary expert estimates regarding an upcoming report on GDP or employment for a country or region, it is difficult to obtain an immediate clear picture of the overall health of the economy and all contributing factors. Thus, a precise method is needed to translate all this macro-economic data into a reliable trading strategy, with timely entry and exit points.
A trader who scrutinises market conditions with the help of fundamental analysis will usually establish a model on which a trading strategy can be based. Such a model generally encompasses a set of empirical data. Its main objective is to project market behaviour and determine future values of currency pairs (or share prices) by using an array of past values of basic macro-economic (or corporate) indicators. The information gathered is used to derive trades that exploit this same information in the best possible way.
Forecasting models are as numerous as the analysts who develop them. This is because different people may look at the same set of data from different perspectives, drawing completely different conclusions about the impact the market is likely to experience.
Having said all this, we reach an obvious conclusion: a thorough study of each major fundamental indicator is needed before attempting to connect all the dots and view the bigger picture. On the other hand, a little more practice and experimentation are required to see which fundamentals are the most suitable for one’s style of trading.
What does it include?
Many Forex traders consider fundamentals the major forces driving a nation’s economy. From interest rates and central bank policies to political events and natural disasters, fundamentals form a dynamic and complex combination of distinct plans, trading behaviours and unforeseen events. Therefore, a beginner trader needs to gain an understanding of those indicators that exert the greatest influence on the currency market.
In terms of the stock market, fundamental analysis attempts to estimate the true (fundamental) value of a given company so that investment decisions can be based on this assessment. In fact, the same process applies in Forex. Forex traders using fundamental analysis attempt to evaluate currencies and their respective countries just as they would corporate entities. To reach the fundamental (true) value of a particular currency, these traders use a wide range of economic and non-economic events.
All the macro-economic reports and political and social news released by a given country are similar to corporate news in that the information is used by investors and analysts to form an idea of value. This value tends to change over time because of the influence of many factors, including, for example, the resilience of a nation’s economic growth and its resource and financial potential. Fundamental traders regard all this as extremely important when assessing the value of a given currency.
Market expectations
In Forex, and in trading as a whole, information flows in a matter of seconds. That is why anticipation and speculation regarding an event or data release influence markets even before the event actually occurs or the data are published. During that period, price can be very volatile; it can move more than 100 pips. That is why there are so many expectations and so much urgency around news-release time. Thus, sometimes market expectations (the predicted figures) can appear to be more important than the data themselves. Most traders decide whether to enter a position by comparing the actual (newly released) figures with the forecast figures and judging how the difference might influence price action.
In this article we have discussed some of the basic macro-economic and fundamental ideas that are closely related to the Forex market and influence the movement of currency pairs. Beginners should now be aware that currencies and countries, just like corporate structures, tend to change in value – a process driven by fundamental factors such as Gross Domestic Product and interest rates. Next, we shall explain each of the most important elements of fundamental analysis with regard to a country (and its currency).