Fundamental Analysis Understanding Supply & Demand in Forex Trading
In our first lesson of fundamental analysis, we’ll explore what it is, how it can help you as well
as the impact of supply and demand on exchange rates.
Basics of fundamental analysis
The study of the socioeconomic and political variables that influence currency exchange
rates is known as fundamental analysis. The goal is to determine a currency’s fair value
relative to another so as to predict exchange rate movements.
What is Supply & Demand?
In general, the higher the demand for a product or service, the higher its price and vice versa.
When demand is high, sellers can choose the buyer offering the highest price. Conversely,
lower demand, limits seller’s options, driving prices down. In a similar manner, greater supply
typically lowers prices as buyers have more options, while limited supply raises prices due to
fewer options for buyers.
Examples
1. BMW limited edition
High demand: A new BMW model will probably cost a lot if there is strong demand and only
500 are produced worldwide.
Greater supply: The price will probably decrease as more cars become available if BMW
announces plans to produce an extra 50,000 units.
2. Village potato farmer
Good Harvest: A farmer grows 1000kg of potatoes, which he sells for 1 euro a kilo because
there is an adequate supply.
Poor Harvest: Only 200kg are produced the following year. People will compete for the
limited supply, driving up the price per kilogram even with the same level of demand.
3. Apple iPhone
Release of new model: The cost of the outgoing model typically decreases when a new
iPhone model is introduced.
Demand factors: Rather than a shift in production costs, the price drop is the result of a
decline in the market for the older model.
To sum up, fundamental analysis in forex helps traders understand the dynamics of supply
and demand for trading instruments. Prices for currencies can rise due to strong demand
and vice versa. We’ll explore the different factors influencing fundamental changes in our
upcoming lesson.