Title can speak a lot for itself but it’s reasonable to elaborate more about this kind of analysis. In simple terms there are fundamental forces which guide any kind of market in planet earth, this forces are supply and demand forces. For any currency to raise it’s value against the other it has to create scarcity which will cause more tension on the demand side. After knowing this kind of information a trader can try to predict market direction to be in particular direction based on current demand. However this is not as straight forward as it look like and the main reason is, a huge number of factors which affect demand and supply in forex market. In practice it’s almost impossible to know exactly how market will move and when will it respond to particular news or policy.
To simplify this, let us assume, particular country has decided to issue new money supply to it’s economy, hence lower the value of their currency. This might seem to weaken this particular currency and economy but it will not be sufficient factor to exactly predict market movement in long run, here are other few factors which can totally flip our coin, 1st, Since all currency pairs are traded against other currencies, this effect might be cancelled out when other currency experience the same effect, 2nd, Regardless of central bank announcing about new money supply, an ordinary traders will not be able to know at which rate new currency will penetrate to the economy enough to produce the desire effect, 3rd, While 1st and 2nd factors are within play we will not be able to know what other policies might come in place and interfere with market contrary to previous analysis. So, in brief it’s not press and play. With all difficulties mentioned, forex market is a decentralized market, this means each currencies with their respective central banks operate independently of each other, with this additional phenomenon it’s pretty hard to know the exactly total volume in the market, so as it’s corresponding supply and demand in the market.
If all this madness is going on, why should we even pay attention to fundamentals?
Most of traders ask this kind of question after realizing fundamental analysis will never provide them with proper direction of the market. It’s true that, fundamental analysis will not give you the luxury of knowing market direction but will give you a hint which will enable you to bias your probabilities more efficient. After collecting a reasonable number of factors on particular market you will have a certain degree of understanding on how market reacted the way it does but cold truth is, you will never know when the effect will truly be mimicked in the market and for how long it will move the market in particular direction.
Afromist 