Fundamental analysis takes into account the economic fundamentals of a country that affect its exchange rate in the Forex trading. Different economic indicators act as fundamental forces to drive currency markets.
Balance of trade
Balance of trade of a country is the record of its exports and imports. It plays an important role in determining the exchange rate of a country’s currency in the Forex market. The currency of a country with long-term trade surpluses gains higher value against the currencies of the countries with persistent trade deficits.
Relative inflation rates
After balance of trade, relative inflation rates are the highly significant factors to determine the exchange rate of a country’s currency. If a country has a higher rate of price inflation, its currency ought to weaken in comparison with currencies of other countries that have a lower rate of price inflation with purchasing power parity.
Interest rates play a highly significant role in determining economic indicators of the economy. Like stock markets, Forex markets are directly affected by the prevailing economic conditions, regionally and globally. The currencies with high real interest rates have high exchange rates in the Forex trading.
Expectations and speculation
Expectations and forecasts play a highly significant role to fluctuate the prices of currencies in the Forex market. The Forex markets anticipate events such as future rate of inflation etc. which moves the exchange rates up and down.