Fundamental Analysis

Fundamental analysis is a way of looking at the market by analyzing economic, social, and political
forces that affects the supply and demand of an asset. If you think about it, this makes a whole lot of
sense! Just like in your Economics 101 class, it is supply and demand that determines price.
Using supply and demand as an indicator of where price could be headed is easy. The hard part is
analyzing all the factors that affect supply and demand.
In other words, you have to look at different factors to determine whose economy is rockin’ like a
Taylor Swift song, and whose economy sucks. You have to understand the reasons of why and how
certain events like an increase in unemployment affect a country’s economy, and ultimately, the level
of demand for its currency.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good,
their currency should strengthen. The better shape a country’s economy is, the more foreign businesses
and investors will invest in that country. This results in the need to purchase that country’s currency to
obtain those assets.
In a nutshell, this is what fundamental analysis is:
For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is
improving. As the economy gets better, raising interest rates may be needed to control growth and
inflation.
Higher interest rates make dollar-denominated financial assets more attractive. In order to get their
hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the
value of the dollar will increase.

Later on in the course, you will learn which economic data drives currency prices, and why they do so.
You will know who the Fed Chairman is and how retail sales data reflects the economy. You’ll be
spitting out interest rates like baseball statistics.
But that’s for another lesson for another time. For now, just know that the fundamental analysis is a
way of analyzing a currency through the strength or weakness of that country’s economy. It’s going to
be awesome, we promise!