Lesson 12: Introduction to Fundamental Analysis

Part of Module 4: Fundamental Analysis - The "Why" Behind the Moves

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Introduction: The "Why" Behind Price Moves

In the last module, we learned Technical Analysis—the art of reading charts. That tells us what the price is doing and how it's moving. Fundamental Analysis (FA) is different. It's the study of a country's economic health to understand why its currency might get stronger or weaker.

The Core Idea: Strong Economy = Strong Currency

The central idea of fundamental analysis is simple: a country with a healthy, growing economy will attract foreign investment. To invest in that country, foreign companies must first buy that country's currency. This increased demand causes the currency's value (its exchange rate) to rise.

What are "The Fundamentals"?

When traders talk about a country's fundamentals, they are looking at key pieces of economic data that signal its health. The most important ones are:

1. Interest Rates: This is the single most important driver. A higher interest rate offers a better return for holding a currency, attracting investors and strengthening the currency.
2. Economic Growth (GDP): Gross Domestic Product is the total value of all goods and services a country produces. A rising GDP indicates a strong, healthy economy.
3. Employment Data: Low unemployment means people have jobs and are spending money, which signals a strong economy.
4. Inflation (CPI): The Consumer Price Index measures rising prices. High inflation can force a central bank to raise interest rates to control it.

Conclusion: Combining Fundamentals and Technicals

Most professional traders use a blend of both. They use fundamental analysis to form a long-term directional bias (e.g., "The U.S. economy is strong, so I should be looking to buy the Dollar"). Then, they use technical analysis to find a precise, low-risk entry point for their trade.