Fundamental analysis

Fundamental analysis asks why a currency should be worth more or less. In forex that mostly comes down to comparing two economies and their central banks.

What fundamental traders look at

• Interest rates and expectations: the single biggest driver. See interest rate differential.
• [Inflation](/glossary/inflation): shapes what central banks are likely to do next.
• Growth and jobs: GDP, PMIs, employment reports such as NFP.
• Trade and capital flows: current account balances, investment flows.
• Politics and risk sentiment: elections, fiscal policy, geopolitical shocks, and demand for safe havens.

Expectations, not levels

Markets price in what they already expect. A fundamentally strong economy does not guarantee a rising currency if that strength is already reflected in the price. What moves rates is new information that changes expectations.

Worked example

Illustratively, UK inflation is running at 4% and the Bank of England has signalled one more hike, while euro area inflation is 2% and the ECB is on hold. A fundamental trader might expect the rate gap to widen in sterling's favour and lean towards a stronger pound against the euro. If UK data then disappoint and markets price out the hike, the view can be wrong quickly.

Fundamental versus technical

Technical analysis studies price itself. Many traders use both: fundamentals for the broad direction, charts for timing and stop-loss placement. See what moves currency prices and how economic data moves forex.