What is Fundamental Analysis

Anyone who hopes to trade in Forex market needs to understand the exact nature of the market and its potential for profits. It is not an easy task to do this. In fact, traders try to obtain a clear understanding of the market through technical analysis and fundamental analysis. Fundamental analysis takes into consideration various economic indicators that show the strength of the economy and the political climate prevailing in the country and how they impact the currency price movements in the Forex market. The index may show the import/export trade balance between countries, the Gross Domestic Product or GDP, PPI or the Producer Price Index, the consumer Price Index or a host of other indices. The following indices considered in Fundamental Analysis of the market are generally indicative of the strength of that country’s currency.
Import and Export Trade Balance
This perhaps is the primary index that is used by Forex traders as it correctly indicates the strength of the currency. A trade deficit generally means that the currency is weak.
Consumer Price Index (CPI)
This is one of the closely followed indices by Forex traders. This index is based on the consideration of a fixed basket of goods and services used by consumers. The products considered do not include the food and energy sectors as they are too volatile. The index is prepared on a monthly basis and is a good guide of the inflation levels of the country.
Producer Price Index (PPI)
This is another index that is based on the prices of certain goods the average price of which are indicative of the inflation levels faced by the country. Reported monthly, this gives manufacturing prices for the fixed basket of products. Again, food and energy sectors are excluded as they are considered to be too volatile.
Gross Domestic Product (GDP)
This quarterly report is a measurement of the country’s economic activity. Production during the quarter is a good indicator of the country’s economic strength.

Apart from these main indicators there are others that can be referred to and you can learn more by reading experts tips. They are Retail Sales, Payroll Employment, Durable Goods and Housing Starts. All these are indicators of the economic health of the country and the stability of its currency.