But first, what is the art of fundamental analysis? It is how traders analyze the market by looking at economic, social, and political influences that affect how the market moves. With fundamental analysis, we look at the economic indicators like Interest Rates, GDP, Non-Farm Payroll as well as many more. We look at the economic reports that impacts the valuation of a nation’s currency. These economic reports are released by a nation’s government or central bank and are the means by which a country’s economic health is directly measured. However, it is essential to remember that other factors and policies can and will influence a nation’s economic performance.
Although this seems complicated and over the top and some would even say unnecessary, I would completely disagree. The fact that these fundamental indicators are being ignored by most traders is exactly the reason why you should pay close attention to them, and one such economic indicator that you should pay close attention to is the Interest Rate of a nation. The Interest Rate is how much interest you get for your money, and if a country were to increase their interest rate, that would mean anyone investing in that country’s currency is going to be getting more for their money. Vice versa, if a country were to lower their interest rate, then you can expect to make less on your investment, in which case it might be time to pull out and sell your position.
Knowing simple economics such as interest rate differentials can help you become a better trader, and it can also help you trade currency pairs with more ease. You can apply this strategy to any forex pair because interest rates affect all currency pairs. Look for two currencies that have very different interest rates and notice the direction in which the pair is going.