Aside from technical analysis, another primary approach to analyzing currency market fluctuations is called fundamental analysis. Fundamental analysis is the examination of economic indicators, asset markets and political considerations when evaluating a nation's currency in terms of another. The key to fundamental analysis is to gather and interpret this information and act before the information is incorporated into the currency price. The lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist.
Here some major fundamental factors that can affect currency prices :
1. Decisions on interest rates made by central banks such as the US Federal Reserve or the European Central bank (ECB) monthly.
2. Quarterly GDP figures. Only preliminary national GDP figures generally have the effect of changing market sentiment.
3. Market sentiment data. Market expectations are formed from one week to two days before the event. Participants become well positioned based on expectations. If the figures are not a surprise, profit taking is often the only result.
4. Political Events. National elections, the September 11th attacks, and the war in Iraq are examples of events that have affected currency values.
5. Major indices. Inflation indices, Institute of Supply Management (ISM) in the US and the Purchasing Management Index (PMI) in Europe are also carefully followed by traders.
6. National industrial production figures.
7. US nonfarm payrolls (indicating new jobs created), Michigan sentiment figures in the US, the western German business climate or IFO index, and the Tankan quarterly survey in Japan
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There are times that governments through their Central Banks stand in the way of market forces impacting their currencies, and hence, intervene to keep currencies from deviating markedly from undesired levels. Currency interventions have a notable and oftentimes temporary impact on FX markets. A central bank could undertake unilateral purchases/sales of its currency against another currency; or engage in concerted intervention in which it collaborates with other central banks for a much more pronounced effect. Alternatively, some countries can manage to move their currencies, merely by hinting, or threatening to intervene.