Why should you bother if Britain stays in the European Union or decides to go ahead with the Brexit? Why is the whole world so much concerned with this fact? The UK is the second-largest economy in EU, and its exit would mean a fall in the price of Euro against USD. If you are in forex trading, you will know what this means. Forex fundamental analysis takes into consideration a country’s economy and predicts its currency’s valuation. Brexit will cause the tool to forecast a fall in Euro’s price.
Fundamental analysis in forex involves the interpretation of statistical reports and economic indicators of a country. A country’s GDP, CPI, PPI and employment reports are taken into consideration and are commonly used as economic indicators. These indicators have a direct and predictable impact on the country’s currency and can be used to analyse the forex market.
Consider two cases to understand the concept better.
Say you go into trading with USD 10,000. EUR/USD currency pair is most popular, and you decide to buy this pair. Current market quote of Euro is 1.68 (say), and you can buy around 5952.3 Euros with it. Certainly, you will expect the market quote of Euro to go up and make a profit. Instead, it starts falling and ends up somewhere around 1.65. That’s 300 pips in the loss.
Proper forex fundamentals analysis will state that Canada’s economy is on the rise, and its currency may gain value against Euro. To stop loss, you buy Canadian dollars with your available Euros, and when its market price peaked, you reaped a profit. So, you substituted your loss with Euros with profit in Canadian dollars.
At times, an advanced economy may reduce its interest rates on borrowed money. Say US lends out a sum of money at 5% interest and Russia lends an equivalent sum at 10%. As a trader, you borrow USD 1,000 at 5% interest annually. Forex fundamental analysis reports suggested that Russian economy is likely to grow, and you decide to convert your USD to Russian rubble at a market price of 25 USD/RUB.
Assuming a steady market, say USD/RUB increased, and you get back 27,500 rubbles on your investment of 25,000. When you convert it back to USD, you receive $1,100. Now, you owe USD 1,050 as a debt and in the whole process, made a profit of $ 50.
Keeping track of a country’s economy and making predictions based on the same can be tricky. If it’s too complicated for you, opt for forex fundamental analysis tutorial available online as the knowledge is invaluable, and if applied judiciously, will help you reap profits in more ways than normal buying and selling currencies.
Any crisis in a country results in devaluation of its currency. Forex fundamental analysis will help you keep track of the same and grab the opportunity to make a profit. The two cases stated here are over-simplified for proper understanding, and things are much more complicated in the real world. Carry out a proper fundamental analysis in forex and make your investment count.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.