Fundamental analysis by trading on Forex
Two types of analysis are used for market movements forecasting: fundamental, and technical (the chart study of past behavior of currencies prices). The fundamental one focuses on theoretical models of exchange rate determination and on major economic factors and their likelihood of affecting foreign exchange rates. 1. Theories of exchange rate determination Purchasing power parity states that the price of a good in one country should equal the price of the same good in another country, exchanged at the current rate—the law of one price. There are two versions of the purchasing power parity theory: the absolute version and the relative version. Under the absolute version, the exchange rate simply equals the ratio of the two countries' general price levels, which is the weighted average of all goods produced in a country. However, this version works only if it is possible to find two countries, which produce or consume the same goods. Moreover, the absol...