* Economic conditions

* Political environment, particularly with regard to stability

* Interest rates

* Supply and demand for the currency

* Government policies

* Historic performance of the currency

* International trade position — deficit or surplus

* Consumer price index (CPI)

* Gross domestic product (GDP)

* Cost of producing goods (PPI)

Each country’s central bank oversees the economy, and the fundamentals that affect it. The factors are announced by the central banks regularly, sometimes monthly but often weekly, and the exact time of these announcements is known in advance. Another term for these factors is “indicators”, which you will hear often in forex trading.

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You must understand that these indicators are always pretty much expected by the market even before the announcement. Forex traders position themselves accordingly in the market. Indicators that conform to these expectations will cause little effect on the market.

On the other hand, if these expectations are not what actually occur, currency prices will definitely move. This is the basis of forex fundamental analysis, and many traders rely on it exclusively. (This is probably not wise, however, and a combination of fundamental and forex technical analysis is a better basis for forex trading.)

The European Union’s ECB, the U.S. FED, the U.K. BOE and the Japanese BOJ have the most influence of all the central banks. Forex traders are wise to pay attention to these bodies in their trading.

The biggest impact on the forex market is, not surprisingly, created by U.S. indicators. Although the ECB indicators have less impact, they can make a difference when they are different from what the market expected. Two of the major economic drivers that affect the forex market are interest rates and inflation, so listen carefully when knowledgeable financial experts talk about them.

Forex fundamental analysis is made all the more complicated because accurate measurement of the variables and their relationships is difficult. Estimates are mostly based on historical experience. What is happening in the world, such as major political events or wars and other international catastrophes, can also cause certain assumptions to be made. But these assumptions often don’t come true, and the markets may lag behind a bit in making adjustments.

Supply and demand is a basic rule of life, and nowhere is it more normal than in the forex market. If currency prices remain at the same level despite a decrease in demand, eventually the price will increase. If the supply increases while the demand stays constant, the price will eventually decrease.

In a nutshell, then, this is how forex fundamental analysis works.
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