Fundamental Analysis and Forex: A Beginners Guide

Every time you hear someone talking about analyzing the Forex market they usually tout Technical and Fundamental Analysis. They talk about the need to use both in your analysis and then do very little to tell you how to do this. And while most traders are familiar with Technical Analysis it is hard to pin down exactly what Fundamental Analysis consists of, particularly for the forex market. Most traders are left with questions like"I don't get it" Is there a PE ratio of Japan?? Well, sort of. Fundamental Analysis differs for the Forex market just a bit but the same basic principles apply.
Fundamental analysis for the Forex market examines the macroeconomic indicators, asset markets and political considerations of one nation's currency as opposed to another. Macroeconomic indicators include things such as growth rates (Gross Domestic Product), interest rates, inflation, unemployment, money supply, foreign exchange reserves and productivity. Other macroeconomic indicators include the CPI " a measurement of the cost of living, and the PPI " a measurement of the cost of producing goods. Asset markets are made up of stocks, bonds and real estate. Political considerations influence the level of confidence in a nation's government, the climate of stability and level of certainty.
There is a basic rule of thumb that says a currency can become more valuable in two main ways: when the amount of currency available in the world market place is reduced (for example, when the US Fed increases the interest rates and causes a reduction in spending), or when there is an increase in the demand for that particular currency. But there are also many little influences that can nudge the currencies value enough for the retail forex trader to make (or lose) a substantial amount.
Let's take a moment to examine some of the Fundamental information that has the potential to move the forex market.