What it means
Fundamental analysis asks why a currency should be worth more or less. It examines interest rate decisions, inflation, employment, trade balances, government debt, political stability and the policy statements of central banks (the institutions that set a country's interest rates and money supply).
The core idea is that money flows towards economies offering better returns and greater safety. If a central bank is expected to raise interest rates, investors may buy that currency to earn more on deposits, and the currency's price tends to rise ahead of the change.
Technical analysis ignores the causes and studies the price itself. Analysts plot rates on charts and look for trends, support levels (prices where a currency has tended to stop falling) and resistance levels (prices where it has tended to stop rising), along with tools such as moving averages and momentum indicators.
The two approaches answer different questions. Fundamental analysis is generally more useful for the direction and size of longer-term moves, whereas technical analysis is often used for timing entries and exits over shorter periods.
In a business setting, a treasurer might use fundamental analysis to understand why the dollar is strengthening and what that means for next year's budget. The same treasurer might use a simple technical signal, such as a rate crossing its moving average, to decide when to execute a planned conversion.
Neither method predicts the future reliably, and both can fail when unexpected news arrives. Most professionals combine them, use stop-loss limits, and treat the output as a probability rather than a promise.
In practice
Real-world examples.
Example
A US importer sees that a foreign central bank has signalled several interest rate cuts. Using fundamental analysis, the finance team expects that currency to weaken and decides to delay its purchase of it. The team agrees to review the decision if inflation data surprises on the upside.
Example
A retail trader notices that GBP/USD has bounced off the same price three times in two months. She treats that level as support and places a buy order just above it, with a protective stop below. If the level breaks, the stop closes the trade automatically and the loss stays small.
Example
A multinational's treasury team uses a chart of the 50-day and 200-day moving averages as a guide. When the shorter average crosses above the longer one, the team begins converting a larger share of its foreign income. Each conversion is recorded with the signal that triggered it, so the policy can be reviewed later.
Formula
Calculation
Simple moving average (SMA) = sum of closing rates over N days / N
Suppose the closing EUR/USD rates for the last five days are 1.1000, 1.1020, 1.1040, 1.1060 and 1.1080. The sum is 1.1000 + 1.1020 + 1.1040 + 1.1060 + 1.1080 = 5.5200. The five-day SMA is 5.5200 / 5 = 1.1040.
If today's rate is 1.1100, it sits 0.0060 above the average (1.1100 - 1.1040), which a technical analyst would read as an upward trend. A fundamental analyst would want to confirm it with news on interest rates or growth.Case study
Seen in the real world.
Tidewater Components is an illustrative, fictional manufacturer that buys raw materials priced in Swiss francs. The treasurer wanted to decide when to buy francs for the year ahead without gambling on the market.
She started with fundamental analysis, reading central bank statements and inflation data to build a view that the franc would stay strong. She then used technical analysis to select entry points, splitting the purchase into four equal parts on pullbacks to a moving average.
In this illustrative case, the average cost came out lower than a single purchase at the start of the year. The key point was that analysis was used to improve timing and not to speculate, and the board approved a policy that kept the total exposure fully covered. Tidewater now reviews the process twice a year, comparing its average purchase rate with the simple alternative of buying everything on day one.
Watch out
Common mistakes.
- Relying on a single indicator, when signals often conflict and need confirmation from other evidence.
- Treating technical patterns as certain, when they only describe what has happened before and offer probabilities.
- Ignoring scheduled events such as central bank meetings, when these can overwhelm any chart pattern within minutes.
Questions
People also ask.
Which is better, fundamental or technical analysis?
Neither is better in every case, because fundamental analysis suits longer-term views and technical analysis suits timing, so many professionals use both.
Can analysis guarantee a profit?
No, it only improves the odds, and every trade still needs a plan for what to do if the view is wrong. That plan normally includes a stop-loss level and a limit on position size.
What data do fundamental analysts watch most closely?
Interest rate decisions, inflation, employment and growth figures, trade data and central bank commentary tend to carry the most weight. Markets often react more to the surprise relative to expectations than to the figure itself.
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