Analysis and Opinion »

What are the fundamentals?

Jarratt Davis
Share on StockTwits
Published on

In a nutshell fundamentals are expectations; it all revolves around the central bank of each currency.

For example the US their central bank (the Federal Reserve) their job is to direct monetary policy. The reason it does this is to control the economy if they need to get the economy going  they will implement certain tools if however they need to curb the expansion of their economy (i.e. it is expanding too fast and inflation is growing too fast) they will temper that by employing a different set of tools to control it .

Basically its goal is to keep the economy on a nice, straight, stable path, that’s important because what the central bank does also affects the currencies, very heavily.

Fundamentals are what investors are expecting the central banks to do next, we ascertain this by looking at all the economic information regarding those central banks and the markets to try to figure out how will the central bank react to this information and what will that mean for the currency. If for example inflation is getting too high we can expect the central bank to raise interest rates which will cause the currency to appreciate as investors migrate to this currency if however inflation is faltering we could expect the central bank to cut rates which will cause the currency to devaluate.

The reason why this is so important is because the central banks make it very clear what their concerns are, they will tell the market through their statements what their concerns are such as employment, inflation  etc  the market  then use this information to then trade off it.

All in all fundamentals are the expectations of the market and what their expecting the central bank to do, whatever they’re expecting the bank to do that’s the way the currency will move in the medium to long term.

Share on StockTwits