While many Forex traders spend a great deal of their time poring over charts filled with indicators and try to understand where the market is going purely through technical analysis methods, there are other factors that may influence market values as a whole.
Fundamental factors are economic data that can change the way traders and investors view the risks or probable direction of the various currency pairs on the market. I believe that any “thinking” Forex trader should be aware of them and take not of them in his or her trading decision.
Let’s go over some examples of fundamental factors and see how they can influence currency prices:
1. Interest rates – Each country (or group of countries in case of the Euro) can set its own interest rates. These determine, among other things, the return on low-risk deposits and bonds in that country or that currency. Naturally, the higher the return a certain currency can yield, the greater its attractiveness, so you may expect that increases in interest rates, or probably ones, can cause a spike in the value of a certain currency.
2. Financial difficulties – As can be seen by the case of Greece, major financial difficulties can weigh on the value of a currency. The major deficit of Greece, the abundance of debt, and the market concerns that it will default on its loans, have put tremendous pressure on the Euro. It is likely that the wealthier Euro nations will have to bail Greece out by pouring a lot of Euro into the market. This may reduce its value in the short and long run.
3. Commodity prices – These usually influence the price of the US Dollar as commodity prices are often quoted in dollars. It often happens that when Oil prices go up, the value of the dollar in relation to other currencies decreases since you need more dollars to buy a single barrel of oil.
4. Political events – Wars, elections, earthquakes, and other political or natural events can prove to be very dramatic in terms of currency values. This are always surprising and difficult to predict. However, these can cause massive swings in market values.
Make sure to use data as it comes out in your trading analysis. Use it with technical analysis to make it more accurate.