Fundamental Analysis for Currencies

When it comes to currencies, there’s always one big question:

What makes one currency more valuable than another?

After all, most currencies are just paper and digital entries. So why does one outperform the other?

The basic theory is simple:

The stronger a country’s economy, the stronger its currency.

To measure the strength (and future potential) of an economy, traders monitor economic indicators that are released regularly. Here are some of the most important ones to watch:

Non-Farm Payrolls (NFP) – U.S. Only

Released: First Friday of every month
This is key U.S. job growth data. A higher-than-expected NFP number signals economic expansion which typically boosts the U.S. dollar (USD) against currencies like the EUR, GBP, JPY, and CHF.

Retail Sales

Retail sales reflect consumer spending the lifeblood of most modern economies.

More spending = more confidence = growing economy = stronger currency.
Weak or falling retail sales, on the other hand, may signal a slowdown.

Unemployment Rate

This measures the percentage of people unemployed.

Rising unemployment = fewer people earning and spending = weaker economy = potential currency weakness.
High unemployment also increases government spending (e.g., on benefits), putting further strain on an economy.

GDP – Gross Domestic Product

GDP is the big picture, it measures the total value of goods and services produced by a country.

• Rising GDP? Economy is growing. Good for the currency.
• Falling GDP? Economic trouble. Bad for the currency.

CPI – Consumer Price Index (Inflation)

CPI tracks the prices of everyday goods, basically it’s a measure of inflation.

• Rising inflation means it’s more expensive to live, which can slow down consumer spending.
• Controlled inflation is often a good sign, especially if wages are rising too.
• Central banks may react by raising rates, which usually strengthens the currency.

Interest Rate Decisions

Central banks set interest rates based on the state of the economy. They can either:

• Tighten (raise rates) to cool down inflation or an overheating economy.
  Attracts international capital = stronger currency.
• Loosen (cut rates) to stimulate growth during weak economic periods.
  Encourages borrowing and spending = can weaken the currency.

Central Bank Press Conferences

After rate decisions, central banks (like the Fed or ECB) hold press conferences to explain their outlook.

Two key terms to watch for:

• Hawkish = aggressive tone, hints at future rate hikes = Bullish for the currency.
• Dovish = cautious or nervous tone, hints at rate cuts or economic concerns = Bearish for the currency.

Final Thoughts

Understanding these fundamental indicators gives you a big edge when trading forex. They don’t move the market every single time but over the long term, they shape the entire economic narrative behind every currency.