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How to Determine When to Make Your Move
Submitted by Tradervox on Tue, 19/04/2011 - 17:19
Forex fundamental analysis tells you about the long term movements in the currency markets. This long term can range from six months to a few years. Some traders only use fundamental analysis to make their position trades. For example, right now it is being anticipated that the EURO might get imploded due to the sovereign debt problem that the EURO zone is facing.
Some say if either Spain, Ireland or Greece default, it is all over for EURO. Now, this implosion of EURO is being anticipated in the next six months to a few years and is based on the events that have been mentioned. Will it take place? Nobody knows! Fundamental analysis is somewhat subjective and three different traders might have three different opinions about the same currency.
In the same manner, FED is printing too much paper money in an effort to kick start the US economy. Will it be good? Nobody knows but most of the analysts are of the opinion that this too much printing of the greenback is going to kick in the inflation that was successfully controlled in 1980s by the tight monetary policy followed by the FED.
So, what are the implications of the rising inflation on the greenback? Inflation causes the currency to lose value against the other currencies. This means US Dollar is expected to depreciate in the next six months to two years. This depreciation of US Dollar will not happen immediately but will take place over the coming years.
Whatever, forex fundamental analysis answers questions like these like the effect of inflation on the currency, what will be the effect of too much national debt on the currency, what can be the effect of the interest rate change on the currency, how the fiscal deficit is going to effect the currency?
So, how do you answer the above questions using forex fundamental analysis? Forex fundamental analysis takes a deep look at the national economy and studies the GDP, CPI, PPI, Consumer Confidence Index, Housing Sector Sales and a host of other indicators to determine the overall direction of the currency in the long term.
Now, there are traders who use forex fundamental analysis to make position trades. Position trades are long term trades that continue for months to years. For example, Carry Trading is a forex fundamental trading strategy that entail selling a low interest rate currency and buying a high interest rate currency and profiting from the interest rate differential between the two currencies. Whatever, as a forex trader, you should not ignore forex fundamental analysis as it gives you the long term picture of the currency.