The foreign exchange market is the largest financial market in the world, and its volatility is influenced by multiple factors. For beginners, mastering fundamental analysis, the “market perspective lens”, is crucial. This method not only explains the underlying logic behind currency fluctuations but also helps newcomers avoid the cognitive blind spot of “interpreting charts without context”. This article, from a practical perspective, will guide you through the fog of economic indicators, policy signals, and international events, gradually building a systematic fundamental analysis framework.
The price fluctuations in the foreign exchange market are essentially a reflection of a country’s economic strength and policy orientation. The core of fundamental analysis lies in interpreting macroeconomic data, policy trends, and international events to assess the long-term value of a currency and the risks of short-term volatility.
Gross Domestic Product (GDP), inflation rate, unemployment rate, and trade balance are core indicators of a country’s economic health. For example, a country with a GDP growth rate exceeding expectations often attracts foreign capital inflows, driving its currency to appreciate; whereas a continuously rising inflation rate may prompt the central bank to raise interest rates, boosting the currency’s value in the short term, but if uncontrolled, it could trigger an economic recession and currency depreciation. For instance, during the Federal Reserve’s rate-hike cycle in 2022, robust US GDP growth and inflationary pressures drove the US Dollar Index sharply higher, while the euro fell below parity against the US dollar as the eurozone’s trade deficit widened due to the energy crisis.
The interest rate decisions and quantitative easing policies of central banks directly influence currency supply and demand. When a central bank raises interest rates, the yield on domestic assets increases, attracting international capital inflows and boosting currency demand; conversely, rate cuts or expanded quantitative easing may lead to capital outflows and currency depreciation. For example, the Bank of Japan’s long-standing ultra-low interest rate policy has made the yen a primary funding currency for carry trades, with its exchange rate highly correlated to global risk sentiment. Investors need to closely monitor the “forward guidance” in central bank statements, as these signals often indicate future policy paths and, in turn, shape market expectations.
Wars, elections, trade disputes, and other geopolitical events can instantly shift market risk appetite. After the outbreak of the Russia-Ukraine conflict in 2022, risk aversion pushed the US dollar and Swiss franc higher, while the euro fell more than 10% in the short term due to its economic outlook deteriorating from energy dependence on Russia. The impact of such events is not limited to short-term volatility; sanctions, supply chain restructuring, and other long-term effects may also reshape currency fundamentals.
To do a good job, one must first sharpen one’s tools. Investors can efficiently obtain and interpret key information through the following tools:
The Bloomberg Terminal provides real-time global economic data, central bank policy minutes, and in-depth analytical reports. Its “ECST” function allows one-click comparison of multiple countries’ GDP, inflation, and other indicators. TradingView, on the other hand, enables users to embed an economic calendar into price charts, visually observing market reactions before and after data releases. For example, if non-farm payroll data significantly exceeds expectations, the US Dollar Index often forms a “price gap” on the chart, which, combined with technical indicators, can verify the trend’s strength.
Investors should regularly review economic calendars and mark the release times of key data (such as US CPI and Eurozone PMI). After data releases, it is crucial to distinguish among three scenarios: “in line with expectations”, “unexpectedly higher”, and “unexpectedly lower”. For example, in September 2024, US non-farm payrolls came in below expectations, prompting the market to delay its forecast for Federal Reserve rate hikes, causing the US Dollar Index to drop 0.8% that day. Additionally, the CBOE Volatility Index (VIX) and implied volatility in forex options can quantify market fear levels, aiding in assessing demand for safe-haven currencies.
While fundamental analysis excels at capturing long-term trends, short-term markets may deviate from fundamentals due to sentiment-driven fluctuations. Combining technical analysis can optimize trade timing:
The forex market is a complex network interwoven with economic data, policy games, and human emotions. Fundamental analysis provides investors with a “telescope” to see through price fluctuations, but its effectiveness relies on three key points: first, dynamic tracking of economic indicators, second, in-depth understanding of policy logic, and third, quick response to unexpected events.
Investors should establish a “data archive”, regularly reviewing the relationship between historical events and exchange rate movements (such as the 2015 Swiss franc black swan event), gradually cultivating an intuitive sense of market context. It is essential to integrate fundamental analysis with technical tools and risk management to navigate the ever-changing forex market steadily and sustainably.
Fundamental analysis is a strategy that evaluates the long-term value and short-term fluctuation direction of currencies by interpreting national economic data (such as GDP and inflation rate), central bank monetary policies, and international political events. It is suitable for capturing the “fundamental drivers” of exchange rate trends.
The three core elements are:
Technical analysis focuses on price chart patterns and is suitable for short-term trading; while fundamental analysis explains the “reasons” behind market fluctuations and is better at identifying medium to long-term trends.
It is recommended to use an “economic calendar” tool (such as TradingView) to mark the release times of key indicators such as non-farm payrolls and CPI.
