Fundamental analysis deals with the factual influences on the market and the trader will aim to predict economic developments and the impact on the direction of foreign exchange rates.

Frequently, there is an almost hostile atmosphere between technical and fundamental traders, disrespecting the other's approach. This is clearly wrong, as there are merits to both approaches and the combination of the two will often give excellent results. The great advantage of technical analysis is the ability to fine-tune and accurately time market entries and exits, while the fundamental approach will deal better with the longer term directional views.

Many aspects are taken into consideration when applying fundamental analysis. Many of the monthly and quarterly economic statistics give good indications of the strength of the economy. This indicates probable future changes in short and long-term interest rates that are of great significance to foreign exchange trends. Generally, high short-term interest rates will be supportive for a currency, unless confidence is undermined by fears of strong inflationary pressures.

International trade and investment flows are followed closely to assess the implications for the relative strength of buying and selling for commercial and cash transactions.

Political events, such as elections or cabinet appointments can often have significant impact on foreign exchange markets, depending on the perceived policy impact on the economy.

Monetary policy is also followed very closely, including the indicators shaping such policy decisions. Money supply, central bank interventions and short-term interest rates are all significant factors for fundamental analysts.

Trading currencies is probably the purest way of taking a view of a country's overall economic situation. Events in South East Asia in the second half of 1997 clearly showed the consequences when confidence in a local economy collapses and the most efficient way to profit from such expectations is shorting the currency involved.

The overall stronger economic situation in the US compared to Continental Europe likewise resulted in a substantial appreciation in the US currency during 1997. But, to return to the Fundamental vs. Technical argument, the rally in the US dollar also resulted in clearly bullish technicals, underlining the fact that the two approaches are by no means contradictory.