What is fundamental analysis?
Learning objectives
Explain what fundamental analysis is and the question it sets out to answer
Trace the chain that connects an economic data release to a currency's price
State honestly what a retail trader can and cannot do with fundamental analysis
Asking the right question
Fundamental analysis looks past the chart to the conditions underneath it.
For a currency: what makes people want to hold this one rather than that one?
For a share: what is this business actually worth, and is the market paying more or less than that?
For a commodity: how much of it exists, and how badly does anyone need it?
Different assets, one shared logic. Something determines what an asset is worth, and studying that something is fundamental analysis.
The most important chain of events
Since currencies are where most people start, here's the chain that explains almost every large move in foreign exchange.
Economic data → expectations about central bank policy → interest rate differentials → currency demand
Money moves toward where it earns more, adjusted for risk. If markets come to expect one central bank to raise rates while another holds or cuts, capital tends to flow toward the higher-yielding currency, and the pair moves.
This is why a US employment figure moves EUR/USD. It isn't really about the jobs. It's about what the jobs imply the Federal Reserve will do, and what that implies for anyone choosing between holding dollars and holding euros.
Lesson 4 of this course covers the central bank end of that chain properly. What matters now is recognising that the data is a means to an end. Nobody trades a jobs number because they care about employment.
What drives what
Briefly, and only as orientation, since lesson D1.3 covered the instrument-by-instrument detail:
- Currencies: rate expectations, inflation, growth, trade and capital flows
- Indices: corporate earnings, economic growth, and rate expectations, because higher rates reduce what future earnings are worth today
- Commodities: physical supply and demand, inventories, production decisions, geopolitics
- Gold: real interest rates, risk sentiment, central bank buying
- Individual shares: earnings, margins, company guidance, competition
Understanding the two speeds
Fundamentals arrive at two very different tempos, and confusing them causes problems.
Structural fundamentals move slowly. A country's growth trajectory, its trade position, the credibility of its central bank. These shift over quarters and years, and they set the backdrop against which everything else happens.
Event fundamentals arrive in an instant. A scheduled data release or a central bank statement that changes what the market expects. The underlying economy didn't change in that second. The expectation did, and price follows expectation.
Almost all retail interaction with fundamentals is the second kind. Lesson F5.3 covers the four events that matter most.
The limitations
Four things worth knowing before you invest time in this.
You cannot out-research institutions. Banks employ teams of economists, subscribe to data feeds you don't have, and act within milliseconds of a release. Any approach that requires you to be better informed than they are will fail. Build nothing on that foundation.
Fundamentals say nothing about timing. A currency can be fundamentally mispriced for years and go on being mispriced while your position is closed out. Being right eventually and being solvent now are different conditions, and What is drawdown and how to recover (Risk Management) explained which one matters.
The market prices expectations, not facts. Genuinely good news can send a currency lower if the market expected better. This is the single most counterintuitive idea in the course, and The big four: NFP, CPI, interest rates and GDP (Fundamental Analysis) gives it proper treatment.
Relationships break. Higher rates usually strengthen a currency. Usually. When growth fears dominate, a rate rise can weaken one instead, because the market reads it as damaging. Textbook relationships are tendencies, and they fail often enough to ruin anyone treating them as rules.
What it's actually for at retail level
Given all that, three uses remain, and none of them requires you to predict anything.
Context. Knowing what regime you're in. Is inflation the dominant question or is growth? Are central banks moving together or apart? This changes which technical approaches work and which fail.
Not being ambushed. Knowing when high-impact events land, so you're never holding a leveraged position through one without having decided to. This is the lowest-effort, highest-value use of fundamentals available to a retail trader, and How to trade news events (Fundamental Analysis) covers it.
Directional bias over longer horizons. If you're holding for weeks, having a view on which of two currencies has the stronger case is worth something. If you're holding for minutes, it isn't.
Those three are achievable on an hour a week. Predicting data releases is not achievable at all, and material suggesting otherwise is worth walking away from.
Key takeaways
Fundamental analysis asks what an asset should be worth and why, where technical analysis asks what its price is doing
For currencies the chain runs from economic data to central bank expectations to rate differentials to currency demand. The data is a means to that end
You cannot out-research institutions, fundamentals say nothing about timing, and textbook relationships are tendencies that break regularly
Three realistic retail uses: knowing the regime, avoiding being ambushed by events, and forming a directional bias over longer horizons