Forex traders usually comprehend basic principles of the financial markets through technical or fundamental analysis. However the most successful traders do often practice both of these types of analysis.
As a rule, fundamental analysis consist in estimation of the currencies value by analyzing a stream of economic and financial data. Traders permanently analyze the fundamental economic data from concrete country in order to set a real internal value of the country's currency.
There are several general ideas that every trader should comprehend on a primary level. The changes of these key indicators usually impact on the value of a currency by driving it up or down.
Interest Rates
It is the main factor of currency value on a long-term horizon. Most Central Banks set interest rates each month, and these decisions are viewed very thoroughly by forex traders. Interest rates is an instrument of control of the stock of money in an economy.
Gross Domestic Product (GDP)
GDP is the most important factor of economic condition in a country and growth outlooks are expected every year in order to fix how fast an economy should grow. Whenever GDP falls or beats market expectations - it is seen in changes of the currency value.
Inflation
Inflation breaks the real purchasing capacity of money, and, therefore, inflation has very fundamental impact on the economy in different circumstances. Every year a usual rate of inflation between 2-3% is expected, but if inflation begin to move faster than targets set by the Central Bank, a currency value will change.
Unemployment
When unemployment rate grows, it has a destroying effect on economic growth; therefore, when it usually happens, interest rates are often cut in an attempt to increase the stock of money in the economy and stimulate economic growth.
Consumer Demand
Healthy consumer demand is vital to the strength of an economy. When consumers want more goods and services, the economy continue to develop, but when consumers can not afford goods and services, the economy stumbles.