Basics
of Fundamental Analysis
Currencies
are constantly affected by the economic situation of their countries as
well as
the supply and the demand on these currencies. The fundamental analysis
depends
on the trader in keeping up to date on major news, reports, and
political and
financial events that has a significant impact on related currency.A trader needs to understand a great deal of the world economies and trends to be able to interpret news right and trade accordingly. When it comes to forex news trading, it is of utmost importance to keep track of major news and events, as it can save the trader losses or generate profits according to his technical analysis.
A good example of profitable fundamental analysis is how some successful traders forecast the drastic decline of the euro when the news of Greece’s debt crisis broke out. As a result, they went short on euro-based pairs and made fortunes.
A good example of successful fundamental trading is when George Soros invested $10 billion going short on GPB/DEM (Great Britain Pound vs. Deutsche Mark). He placed those short positions after concluding from several news releases that the British weak economy and high unemployment rates would not allow it to remain a part of the Exchange Rate Mechanism (ERM). The ERM was a system that gave each member’s currency a central exchange rate against a basket of currencies but required them to maintain their exchange rates within a 2.25 percent fluctuation band above or below each bilateral central rate.
Looking at the financial news, it was clear that the UK’s involvement at ERM was rather unsuccessful. Moreover, the demand for GPB kept increasing.
On 16 September 1992, Chancellor Norman Lamont announced Britain would leave the ERM and that rates would return to their initial level of 10 percent. That day was historically marked by British bankers as the Black Wednesday.
