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Fundamental Analysis

Fundamental analysis studies economic data, central bank policies and geopolitical events to understand what drives long-term price movements in currencies, stocks and commodities.

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Key Economic Events

Event Frequency Impact Currency
Non-Farm Payrolls 1st Friday monthly Extreme USD
FOMC Rate Decision 8x per year Extreme USD
CPI (Inflation) Monthly Very High All
GDP Report Quarterly High All
Central Bank Meetings Monthly/6-weekly High All
Unemployment Rate Monthly High All
Retail Sales Monthly Medium All
PMI Data Monthly Medium All

Interest Rates & Central Banks

Central bank interest rate decisions are the single biggest driver of currency value.
  • Rate Hike: central bank raises rates → foreign capital flows in for yield → currency STRENGTHENS
  • Rate Cut: central bank lowers rates → investors seek better returns elsewhere → currency WEAKENS
  • Hawkish: signals future rate hikes — bullish for currency
  • Dovish: signals cuts or QE — bearish for currency
  • Forward guidance: what the central bank SAYS often moves markets more than the actual decision

Pro Tip: Follow the Federal Reserve (Fed) above all others. USD is involved in 88% of all forex transactions. When the Fed changes policy direction, the entire forex market reacts.

Risk-On vs Risk-Off

  • Risk-On: markets optimistic. Equities up, AUD/NZD/CAD up, USD and JPY weaken, Gold falls.
  • Risk-Off: markets fearful. Equities down, USD/JPY/CHF/Gold up, commodity currencies fall.
  • Monitor S&P 500 as proxy for global risk sentiment
  • Geopolitical events (war, crisis) trigger risk-off immediately
  • Use VIX (fear index) above 25 = heightened risk-off environment

Combining Fundamentals with Technicals

  • Fundamentals tell you WHAT direction to trade; technicals tell you WHEN and WHERE to enter
  • If fundamentals are bullish USD and technicals show EUR/USD at resistance = strong sell setup
  • If fundamentals contradict technicals, skip the trade or reduce position size
  • News events can trigger moves of 50-200+ pips in minutes — avoid trading during announcements unless you are experienced
  • Best approach: Use fundamentals for weekly bias, technicals for daily entries
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Key Takeaways

  • Interest rates are the #1 driver of currencies
  • Higher rates = stronger currency (capital inflows)
  • NFP is the most market-moving monthly event
  • CPI inflation data directly impacts rate decisions
  • Risk-on: AUD/NZD/equities up, USD/JPY down
  • Risk-off: USD/JPY/Gold up, equities down
  • Always check the economic calendar before trading
  • Fundamentals set the direction, technicals time the entry

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