When it comes to forecasting forex rates, the science of fundamental analysis involves taking into account a variety of relevant economic and political factors for one currency relative to the other currency in each currency pair considered.

A fundamental analyst will review as many of these items as possible on a regular basis for each currency and then compare the two to obtain a forecast. Generally, such forecasts are not specific objective numbers for the exchange rate, but instead an overall directional outlook on the currency pair.

For example, their outlook might be positive, negative or neutral after the analysis. This would mean that the analyst expects the exchange rate for the currency pair to rise, fall or stay roughly constant respectively.

Primary Fundamental Information Types

The types of fundamental data items which will most impact a country's currency along with a brief description of its likely effect include the following:

• Growth: Changes in the country's Gross Domestic Product or GDP that gives a useful measure of growth. A growing economy tends to strengthen a currency.

• Rates: The level of short term interest rates in the currency's country of origin affect forex rates because higher rates provide an investment incentive that should strengthen the currency.

• Trade: The country's trade and current account balance can have an impact on forex rates since persistent trade or current account deficits will tend to depreciate that country's currency.

• Economy: The general economic outlook for one country in relation to that of the other country can affect forex rates, especially including the release of key employment reports.

Key Economic Factors

Many forex traders perform a daily review of economic calendars for the currency pairs they maintain positions in. They do so since the release of such key information can often result in considerable short term volatility in the currency market, as well as prompt shifts in market sentiment.

A list of key economic factors that are routinely covered in the current news and which can move the market when they are released includes the following:

• Interest Rates: a key element in evaluating one currency against another. If interest rates are increased, the currency of the country becomes more attractive against other currencies offering lower interest rates.

• Trade or Currency Account Balance: A trade or current account surplus or deficit will either favor the currency rate for the country with a surplus or weaken the rate for the country with a trade deficit.

• Credit: Another economic factor that will influence exchange rates directly. If a country has borrowed excessively large sums of money from other nations or from the IMF, its currency will surely reflect the serious level of debt the country is in.

• Gross Domestic Product (GDP): Represents the total of goods and services a country produces and reflects the level of growth in the economy.

• Commodity Prices: Can affect exchange rates when the country is a producer and net exporter of commodities and if the country imports commodities.

• Employment Data: If a country has an increasing percentage of its citizens employed that will tend to strengthen its currency. This key data typically comes in the form of jobless claims, payrolls statistics or the unemployment rate for a country.

• Industrial Production: A strong industrial base will tend to strengthen a nation's currency.

• Retail Sales: A strong retail sales figure is generally favorable for a currency and the country's overall economy.

• Consumer Price Index (CPI): A measure of inflation. Rising inflation in a country indicates that interest rates may soon be tightened by the national central bank and so will tend to make its currency appreciate.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.