The main idea that lies in the fundamental analysis in forex trading is the examination of the price developments based on the demand and supply. While we are dealing with short term forecasts this method might not sound to that useful, but for the long term expectations it might turn into an unchangeable analysis technique.
There’s no clear judgment stating that the price change is being based solely on the currency origin country economics, but the economy of that state clearly influences the price changes at least in a smaller quantity.
The first factors to look for here are the social and political indicators. Those countries which are facing hard time with dealing with the political processes, fail to come up with more reliable economical agreements worldwide might end up with the collapse of the economy and as a result collapse of their currency. A vivid example is the rapid change of the European economy influenced with the loss of the Euro positioning over the US dollar.
No less importance should be derived to the economical indicators of the country. There’s no clear line between the economical fall and the currency fall if the collapse is local, but obviously the money which needs to be “bought” by the country to serve the local needs is also a great factor.
The gross domestic product (GDP) is the most crucial economical indicator of the country. If at first glance this sounds to be the best indicator of all, then you should consider that it changes all the time and as a result we have only the result of the previous quarter, thus leaving us with the economical forecasts of its changes.
Interest rates are just another indicator. They allow having a look at the expectations of the local banks about their own currency. They balance the demand and supply of the currencies in the country, thus also influencing the expectations from the currency of the World Bank and international bank services.
The product price index (PPI) is not that commonly used indicator, though its significant raise or fall gives us a hint that there’s something wrong with the economy of the state. And especially this is evident if PPI considerably differs from CPI (consumer price index). This last indicator is quite important one. The consumers spend the currency on buying goods and if this doesn’t happen in a typical trend, then the currency flow goes in a wrong direction leaving a high impact on the international currency price.
