Learn Fundamental Analysis
Learn how economic data, interest rates, inflation, company financials, central bank policy and global events can influence markets and help traders understand the forces behind price movements.
What is Fundamental Analysis?
Fundamental analysis examines the economic, financial and broader factors that can influence the value of an asset. Instead of focusing primarily on price patterns, it looks at the forces that may affect supply, demand, growth, profitability and market expectations.
Look beyond the price
Markets respond to changing expectations about economic growth, inflation, interest rates, corporate earnings, government policy and global events.
Fundamental analysis helps traders understand these drivers and consider whether an asset or market may be relatively strong, weak, expensive or inexpensive compared with its underlying conditions.
The "why" behind the market
Technical analysis can help traders study what price is doing and when a market may be changing direction.
Fundamental analysis focuses more heavily on why those changes may be occurring.
Combining both approaches can provide a broader framework for understanding markets.
Three pillars of fundamental analysis
Economic Conditions
Growth, employment, inflation, consumer activity and trade data can provide insight into the health and direction of an economy.
Monetary Policy
Central-bank decisions regarding interest rates and monetary policy can have significant effects on currencies, bonds, equities and other markets.
Supply & Demand
Changes in production, consumption, investment, trade and market expectations can influence the balance between buyers and sellers.
Economic indicators traders watch
Economic indicators provide measurable information about the health and direction of an economy. Their importance can vary depending on the market and the economic environment.
GDP
Gross Domestic Product measures economic output. Changes in GDP growth can influence expectations for economic strength and monetary policy.
Employment
Employment and unemployment data can provide clues about labour-market strength, consumer spending and broader economic conditions.
Inflation
Measures such as consumer and producer price inflation help traders monitor changes in the cost of goods and services.
Interest Rates
Central-bank interest rates influence borrowing costs, investment returns, capital flows and currency demand.
Consumer Spending
Consumer activity can provide insight into economic momentum and can be particularly relevant to companies exposed to household demand.
Trade Balance
The difference between exports and imports can offer insight into international demand and the flow of goods, services and capital.
How fundamental factors can influence markets
Fundamental analysis is about connecting economic developments with changing expectations and potential market reactions.
Economic Data
Growth, inflation and employment figures change the market's view of economic conditions.
→Expectations
Traders reassess the likely direction of monetary policy and economic growth.
→Policy
Central banks and governments may respond to changing economic conditions.
→Capital Flows
Investors may adjust allocations between countries, sectors and asset classes.
→Market Price
Changing expectations can contribute to movements across financial markets.
Why interest rates matter
Interest rates are one of the most closely watched fundamental factors in global markets.
Higher or lower rates can change market expectations
When a central bank changes interest rates, the decision can affect borrowing costs, investment returns and the relative attractiveness of different currencies and assets.
Traders therefore pay close attention not only to the current rate but also to expectations for future policy.
Understanding inflation
Inflation describes the rate at which the general level of prices increases. Changes in inflation can influence consumer purchasing power and central-bank policy.
Rising Inflation
If inflation becomes persistently elevated, a central bank may consider tighter monetary policy. Expectations around future interest rates can then influence currencies, bonds and equity markets.
Falling Inflation
Lower inflation can reduce pressure for restrictive monetary policy. If economic growth is also slowing, markets may begin considering the possibility of lower interest rates.
Understanding company financials
When analysing individual companies, traders and investors can examine financial statements and valuation measures to understand business performance and financial strength.
Revenue
Shows the income generated from a company's operations and can help indicate changes in business demand.
Earnings
Profitability and earnings growth can influence expectations about a company's future performance.
Debt
Debt levels can affect financial flexibility, interest costs and the risks associated with a company's capital structure.
P/E Ratio
The price-to-earnings ratio compares a company's share price with its earnings per share and can provide one valuation reference point.
Geopolitics can move markets
Financial markets can react rapidly to events that change expectations around economic growth, trade, energy supplies or political stability.
Trade Policy
Tariffs, trade agreements and restrictions can influence supply chains, business costs and international demand.
Political Risk
Elections, government policy and political instability can change expectations around economic conditions and investment.
Global Shocks
Conflicts, natural disasters and major disruptions can affect commodities, currencies, equities and global supply chains.
Understanding overvalued and undervalued assets
Fundamental analysis can involve comparing market prices with measures of underlying or estimated value. These assessments are not precise predictions and can vary depending on the assumptions used.
Currency Valuation
Analysts may examine purchasing power, inflation, interest-rate differentials, trade relationships and broader economic competitiveness when assessing currencies.
- Purchasing Power Parity
- Real exchange-rate measures
- Interest-rate differentials
- Trade and capital flows
Stock Valuation
Company valuation can incorporate financial performance, growth expectations and relative valuation measures.
- Price-to-earnings ratios
- Revenue and earnings growth
- Debt and cash flow
- Dividends and profitability
Fundamental vs Technical Analysis
The two approaches examine markets from different perspectives and can be combined within a broader trading framework.
| Fundamental Analysis | Technical Analysis |
|---|---|
| Economic and financial conditions | Price and market behaviour |
| Interest rates and monetary policy | Trends and price structure |
| Company earnings and financial health | Candlestick and chart patterns |
| Supply, demand and economic growth | Support, resistance and momentum |
| Often useful for understanding longer-term drivers | Often useful for timing and market structure |
How to perform fundamental analysis
A structured process can help traders organise economic information and avoid focusing on a single data point in isolation.
Define the Market
Identify the currency, stock, index, commodity or other market you want to analyse.
Review the Economy
Examine growth, inflation, employment and other relevant economic indicators.
Monitor Policy
Follow central-bank decisions and expectations for future monetary policy.
Assess Market Drivers
Consider earnings, trade, supply and demand, geopolitics and market expectations.
Confirm the View
Consider technical analysis and risk management before making a trading decision.
The limitations of fundamental analysis
Fundamental analysis can provide useful context, but it cannot predict market movements with certainty.
Markets can move before the data
- Market prices often reflect expectations before official data is released.
- A strong economic result may have limited impact if it was already anticipated.
- Unexpected developments can rapidly change market expectations.
Fundamental analysis does not provide everything
- Economic data does not always identify precise entry or exit points.
- Market sentiment can dominate price action over shorter periods.
- Combining fundamental analysis with technical analysis and disciplined risk management can provide a more complete framework.
Put Fundamental Analysis Into Practice
Explore the forces that move global markets, follow economic developments and build a deeper understanding of currencies, indices, commodities and stocks.
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