Forex Fundamentals
When we talk about Forex fundamentals, we are referring to the underlying reasons for a currency strengthening or weakening against the currency it is paired against. In its simplest form, we are looking at a strong or weak economy to be reflected in the underlying currency. A strong currency would indicate that the economy is also strong. A weak currency would essentially indicate a weak economy.
The thing we have to realize is that the economy will reflect in the performance of the underlying currency, but not every hour, or every day, or even every week. The price fluctuations in currency trading will happen no matter what the economy is doing. That is to be expected. If an economy is strong or weak, it will be reflected in the long term trend of the currency. The long term trend would be determined by the overall performance of the currency over months or years of time.
Within the long term trends, there will be shorter trends that may be counter to the long term trend. This can occur due to signs that the economic conditions are hinting at a change. There are numerous economic reports being released on a regular basis that are all giving a snapshot of the economy at that particular time. Many times these reports cause an immediate, volatile reaction to the price of the currency. After the knee-jerk reaction though, many times the price returns to levels at or near the price prior to the report.
We need to keep in mind that one report doesn’t show us the overall economic conditions. Just as a currency goes up and down during the day and during a month, economic reports will appear to do the same. There will be good, bad, and neutral reports. We don’t want to overly emphasize one single report, but take in the overall indications of several reports over weeks and months of time to give us the longer term direction of the economy.
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