Fundamental Analysis in Forex: What Moves Currencies
Fundamental analysis in forex explained: what moves currency prices, why surprises matter more than headlines, and how to use it alongside your charts.
A currency pair can drift for weeks and then jump 60 pips in a minute on a number you have never heard of. Charts show you what happened. Fundamental analysis in forex explains why it happened, and what is likely to keep pushing the price in the weeks ahead.
Quick answer: Fundamental analysis in forex means judging a currency by the forces behind supply and demand for it: interest rates and expectations of them, inflation, jobs, growth, risk sentiment, trade and politics. Markets react to the surprise against forecasts, not the headline number. Fundamentals set direction over weeks and months; charts help time entries.
What is fundamental analysis in forex?
A currency is priced like anything else: by supply and demand. When more people want to buy pounds than sell them, the pound rises. When more want to sell, it falls. Fundamental analysis is the study of why people want to hold one currency rather than another, and of what could change their minds.
Demand for a currency comes from four main groups. Companies need it to pay for imports and to convert what they earn from exports. Investors need it to buy that country’s bonds, shares and property. Central banks hold it as part of their reserves. And speculators, from hedge funds to retail traders, buy and sell it to profit from the next move. Each of these flows responds to the state of the economy behind the currency, which is where the analysis starts.
There is one big difference from analysing a company’s shares: a currency pair has two stories. You are never really analysing the euro, but the euro against the dollar, so good news in the eurozone can be swamped by better news in the United States. Every fundamental question in forex is relative: which of the two economies is improving faster, and which central bank is likely to move first?
Most of the time, a handful of forces explain most of what a major currency does. Tap each one in the map below to see which way it pushes.
▲ Higher rates
▼ Lower rates
Higher interest rates attract foreign money seeking better returns, which must be converted into the currency first. Rate expectations are the single biggest driver of major currencies.
The main drivers of a currency, shown for the US dollar. Tap a driver to see which way it usually pushes the currency and why. Most of them act through interest-rate expectations.
Interest rates sit at the centre. Inflation, jobs and growth matter mostly because of what they imply for the next rate decision, which is why the Academy lesson on what moves currencies starts there too.
Interest rates and the interest rate differential
Every major currency has a central bank that sets a policy interest rate: the Federal Reserve for the dollar, the European Central Bank for the euro, the Bank of England for the pound and the Bank of Japan for the yen. That rate feeds through to what savers, banks and bond investors earn in the currency. Money is mobile, and it moves towards the better return. To buy higher-yielding bonds abroad, an investor must buy the currency first, and that buying is what lifts the exchange rate. Step through the chain below, then switch to a cut.
How a central bank rate change reaches the exchange rate: rates, yields, capital flows, demand and price. Toggle to a rate cut and every arrow reverses.
Because a pair involves two currencies, what matters is the interest rate differential: the gap between the two countries’ rates. Suppose, as an illustration, that US rates are 4.50% and euro-area rates are 2.00%. The differential is 2.50 percentage points in the dollar’s favour. If the market comes to expect the Fed to cut while the ECB holds, that gap is expected to narrow, and EUR/USD tends to rise even though nothing has happened yet. The differential also shows up directly in your account as overnight swap, and it is the basis of the carry trade: borrowing in a low-rate currency to hold a higher-rate one.
Rate decisions are scheduled and heavily signalled. The Federal Reserve’s committee meets eight times a year and the ECB’s Governing Council sets policy roughly every six weeks, and both publish statements, minutes and speeches between meetings (see the Federal Reserve and the European Central Bank). By decision day, the market has usually already moved to reflect what it thinks will happen. That is why traders listen so closely to tone. A hawkish or dovish lean in a statement, hinting at higher or lower rates ahead, can move a currency more than the decision itself.
Currencies follow the expected path of interest rates more than today’s level. Our guide to how interest rates affect currency prices goes through the transmission in detail, and the Academy lesson on central banks and interest rates includes an example of a rate rise that weakened a currency.
Inflation, jobs and growth: the economic indicators forex traders watch
The economic indicators forex traders watch most closely are the ones that tell a central bank what to do next. Three families matter more than the rest.
Inflation
Inflation is the rate at which prices rise. Most major central banks aim to keep it around 2% a year, so inflation data is a direct read on whether rates need to go up or down. The headline measure is the consumer price index, or CPI, released monthly. In the short term, inflation that comes in hotter than expected usually supports a currency, because it makes rate rises more likely or rate cuts less likely. That surprises people, because over the long run inflation erodes what a currency buys. Both are true: the short-term trade runs through the central bank, and the long-term erosion matters when inflation gets out of control. The inflation and CPI lesson covers core versus headline inflation.
Jobs
A strong labour market means people are spending, wages are rising and inflation pressure is building. In the US, the monthly employment report, known as non-farm payrolls, is one of the most market-moving releases there is. It is usually published on the first Friday of the month and carries three numbers that can disagree: jobs added, the unemployment rate and wage growth. Traders often care most about wages, because they feed straight into inflation. The jobs data and NFP lesson shows how to read all three.
Growth
GDP, the total output of an economy, is the broadest measure of growth, but it arrives quarterly and describes a period that has already ended. Markets often react more to timelier surveys such as purchasing managers’ indices (PMIs), where a reading above 50 signals expansion. Growth matters to currencies because it decides where in the economic cycle a country sits, and that decides what its central bank is likely to do. Tap through the phases below.
Hiring is strong, spending rises and inflation starts to pick up. The central bank begins raising rates to keep it in check.
Currency: Usually strengthens: rising rates attract capital and growth attracts investment.
The economic cycle and what currencies tend to do in each phase. Expansion usually brings rising rates and a firmer currency; slowdown brings cuts and a weaker one, unless the currency is a safe haven.
A currency whose economy is entering expansion while its partner’s is slowing has the wind behind it. The GDP and growth lesson shows how to compare two economies at different points in the cycle.
Risk sentiment, trade and politics
Not every move traces back to an economic release. Some days every chart moves together, and the explanation is mood.
Risk sentiment
When investors are confident, they buy shares, commodities and currencies that pay higher interest. That is risk-on. When they are frightened, they sell those and buy safe havens: the US dollar, the Japanese yen and the Swiss franc. That is risk-off. A banking scare, a geopolitical shock or a sharp fall in stock markets can flip the mood in hours. Switch between the two below.
Tap a currency to see why it behaves this way.
Risk-on versus risk-off: which major currencies tend to rise and fall with the market's mood. Tap a currency for the reason. These are tendencies, not rules.
The yen’s behaviour is the clearest example. For years Japanese rates were close to zero, so investors borrowed yen to fund higher-yielding positions elsewhere. When fear hits, those positions are closed and the borrowed yen is bought back, which is why the yen can jump in a panic even when nothing has happened in Japan. The risk-on and risk-off lesson explains how to read the mood on a given morning.
Trade and commodities
Countries that export large amounts of one commodity often see their currency follow its price. The Canadian dollar tends to move with oil, and the Australian dollar with metals such as iron ore, one of Australia’s largest exports. These are known as commodity currencies. Over longer periods, a persistent trade deficit, where a country buys more from abroad than it sells, means a steady flow of its currency being sold to pay for imports.
Politics
Elections, referendums, budgets and disputes over government debt all move currencies, mostly through uncertainty. Investors demand a discount for holding a currency whose future policy is unclear. The most vivid recent example is the UK’s referendum on leaving the European Union in June 2016: as the result became clear overnight, the pound fell by more than 10% against the dollar at one point, to levels last seen in the mid-1980s. Shocks like this often arrive outside normal hours, which is one reason a stop loss cannot always protect you from a gap.
Expectations vs surprise: why the headline number is not the news
Before every scheduled release, economists publish forecasts, and the middle of those forecasts becomes the consensus. Traders position for the consensus in advance. By the time the number comes out, the expected outcome is already priced in. What moves the price is the gap between what was expected and what arrived.
This explains reactions that look backwards. A strong jobs number that exactly matches a strong forecast can leave a currency flat, because nothing new was learned. A weak number that is less weak than feared can lift a currency. And a central bank that raises rates as expected, but hints that it has finished, can send its currency lower on the day of a hike.
Two more details matter. The size of the reaction depends on how important the release is and how big the surprise is: a small miss on a minor survey changes little, while a large miss on CPI can reprice the whole rate outlook. And the first move is not always the final one. Releases include revisions and several components, and the initial spike can reverse once traders read past the headline. Try different figures in the simulator below and watch the verdict change.
| Time | Cur. | Impact | Event | Previous | Forecast | Actual |
|---|---|---|---|---|---|---|
| 13:30 | USD | ●●● | CPI (inflation, year on year) | 3.2% | 3.1% | — |
A US CPI release with a 3.1% forecast. Slide the actual figure: equal to forecast produces little reaction; the further it lands from the consensus, the larger the move in EUR/USD tends to be.
Read every calendar entry as a question, not a fact: what is expected, and what would count as a surprise? Our lesson on the economic calendar shows how to read every column of an entry.
Time horizons: what moves currencies over minutes, weeks and years
Fundamental drivers do not all work at the same speed, and mixing them up is a common source of confusion. A data surprise can move a pair 50 pips in a minute and be forgotten by the end of the week. A shift in rate expectations can carry a pair in one direction for months. Long-run forces such as trade balances and the economic cycle play out over years, barely visible on a 15-minute chart.
Match the driver to the timeframe you trade. If you hold trades for a few hours, the calendar matters more than the trade balance: your main job is knowing when a release could knock you out. If you hold for days or weeks, the expected path of interest rates is your main concern, because that is what sustains trends. And no one can trade a years-long theme with a 20-pip stop.
This also explains why fundamentals and charts so often seem to disagree. A pair can be in a downtrend driven by a widening rate differential and still rally 80 pips on one soft release. Both are real; which matters depends on how long you plan to hold. Reading several timeframes together, as the lesson on multi-timeframe analysis shows, is the chart-reader’s version of the same idea.
Fundamental vs technical analysis
Traders often argue about which approach is better, but fundamental vs technical analysis is less a contest than a division of labour: one tells you why a currency should move, the other tells you where and when.
| Fundamental analysis | Technical analysis | |
|---|---|---|
| Question it answers | Why should this currency move, and which way? | Where and when is price likely to turn or continue? |
| Main inputs | Interest rates, inflation, jobs, growth, risk mood, politics | Price, trends, support and resistance, indicators |
| Natural horizon | Weeks to months (minutes around releases) | Any timeframe, from minutes to months |
| Main strength | Explains large, sustained moves and sudden shocks | Gives exact levels for entries, stops and targets |
| Main weakness | Says little about timing; markets can ignore it for weeks | Says nothing about why; can be overturned by news |
| Typical retail use | A weekly bias and a calendar of risk events | Entry, stop loss, take profit and position size |
Both camps have a point. Price already reflects what is publicly known, but the biggest moves on any chart start with a change in fundamentals, and no chart pattern can warn you that CPI is due in ten minutes. Most retail traders who use both settle on the split shown below.
The fundamental view decides which side of the market you look at. The chart decides the exact price, the stop and the target, using tools such as support and resistance or moving averages. When the two agree, you have a trade worth considering. When they disagree, the usual answer is to wait.
How to use fundamental analysis as a retail trader
You do not need an economics degree or a news terminal: just a short weekly routine, a calendar and two or three rules.
Build a weekly bias
At the weekend, spend 20 minutes on each currency you trade. What is its central bank expected to do next? Is inflation above or below target? Are jobs and growth improving or fading? What is the market’s mood? Then write one line per pair: bias bearish EUR/USD: Fed expected to hold, ECB expected to cut. “No view” is a perfectly good answer, and often the most honest one. A bias filters which setups you take and which you ignore.
Read the economic calendar every morning
An economic calendar lists every scheduled release with its time, currency, impact rating, previous figure and forecast. Filter it to your currencies and look only at the high-impact rows. Tap through a typical day below; notice that for unemployment, a higher number is bad for the currency.
| Time | Cur. | Impact | Event | Previous | Forecast | Actual |
|---|---|---|---|---|---|---|
| 13:30 | USD | ●●● | 3.2% | 3.1% | — | |
| 13:30 | USD | ●●● | 185k | 170k | — | |
| 19:00 | USD | ●●● | 4.5% | 4.5% | — | |
| 13:30 | USD | ●●● | 2.1% | 2.4% | — | |
| 13:30 | USD | ●●● | 3.9% | 3.9% | — | |
| 09:30 | GBP | ●●● | 50.2 | 50.5 | — |
A day on the economic calendar. Tap a row to load it, then slide the actual figure against the forecast to see the surprise and the likely reaction in the pair.
Release times are listed in your platform’s time zone, so check which one it uses. Major US data is published at 8:30 New York time, which is 13:30 in the UK for most of the year. Our guide to forex market hours shows how releases line up with the trading sessions.
Do not trade through high-impact releases
In the minutes around a big release, spreads widen, liquidity thins and orders can fill well away from the price you asked for, known as slippage. Your analysis can be right and you can still lose money to the mechanics. A simple rule protects you: no new trades from 30 minutes before a high-impact release in your currencies until 30 minutes after it, and any open trade either closed, or protected by a stop and sized so that a gap would not hurt badly. The forex risk management guide and the lesson on risk per trade cover the sizing side.
EUR/USD is a natural pair to practise this on, because both sides are driven by the two most-watched central banks in the world. Our EUR/USD trading guide covers its main drivers and release times, and the guide to where to place a stop loss explains the stop in step 4.
Common mistakes with fundamental analysis
Reading news as good or bad instead of better or worse than expected
A headline that sounds strong can leave a currency flat, or send it lower, if the market expected more. Always compare the actual figure with the consensus before deciding what a release means.
Chasing the first spike
The first move after a release happens in thin markets with wide spreads, and it often reverses once traders read the detail. Wait for the market to settle and for a setup on your own terms.
Forgetting the other side of the pair
Good UK data does not mean GBP/USD will rise if US data on the same day is better still. Every fundamental view is relative. Write your bias as a comparison between two economies, not a verdict on one.
Holding a large position into a high-impact release
A stop loss is not a ceiling on your loss when prices gap. If you must hold through a release, hold a size whose worst plausible outcome you can accept, or close and re-enter afterwards.
Drowning in data
Watching every release, speech and headline leads to constant second-guessing. Focus on the few drivers that matter for your pairs, mainly central-bank expectations, inflation and jobs, and let the rest go.
Frequently asked questions
What is fundamental analysis in forex?
It is the study of the economic and political forces behind supply and demand for a currency: interest rates and the expected path of them, inflation, jobs, growth, risk sentiment, trade and politics. Because forex is traded in pairs, the analysis is always relative, comparing two economies and the two central banks behind them.
Which economic indicators move currencies the most?
Central-bank rate decisions and statements move currencies most, followed by inflation (CPI) and jobs data such as US non-farm payrolls. GDP and business surveys such as PMIs matter less on their own but help confirm a trend. The bigger the surprise against the forecast, the bigger the reaction tends to be.
Is fundamental or technical analysis better for forex?
Neither is better on its own. Fundamental analysis explains why a currency should move and sets the direction over weeks and months. Technical analysis gives the exact levels for entries, stops and targets. Many retail traders use fundamentals for a weekly bias and the chart for timing, and wait when the two disagree.
Why did a currency fall on good news?
Usually because the news was less good than the market expected. Traders position for the consensus forecast in advance, so the expected outcome is already priced in. If a strong number misses an even stronger forecast, or a central bank raises rates but hints it has finished, the currency can fall.
Do I need to trade the news to use fundamental analysis?
No. Most retail traders are better off avoiding the minutes around big releases, when spreads widen and slippage is common. You can use fundamentals to form a weekly bias, use the economic calendar to know when to stand aside, and take entries from your chart in calmer conditions.
How often should I check the economic calendar?
Look at the week ahead at the weekend and check the day ahead every morning before you trade. Filter it to the currencies in your pairs and the high-impact releases only. It takes a few minutes and prevents the most common avoidable loss: being caught in a position by a release you did not know about.
Free course
Learn this step by step
“Fundamental Analysis” is a free BrokerCut Academy course: 9 short lessons (about 70 minutes), quizzes, interactive tools and a certificate when you finish.
Enrol free
