Fundamental analysis is the study of the core underlying elements that influence and impact the underlying price of a security or a country's economic well-being. This method of study attempts to predict price action and market trends by analysing economic indicators, government policy and other factors. Whilst fundamental analysis in the equity markets may help you forecast the underlying real value of a stock or share, fundamental analysis in the foreign exchange markets helps you forecast economic conditions and underlying direction. Therefore, for the currency markets, fundamental analysis is not an exact science to predict price. For example, you might get a good understanding of the health of an economy by studying an economist's forecast of an upcoming economic release, but that will not give you clear entry and exit points, simply price direction.
Fundamental analysis involves the study of interest rates, central bank policy, political figures or events, employment reports, gross domestic product growth and so on. These economic indicators are snippets of financial and economic data published by various agencies of the government and the private sector for each country. These statistics, which are made public on a regular basis, help traders monitor the health of the economy.
Fundamental analysts broadly classify economic data and news releases into three categories: (i) those that reflect the current state of the economy are known as coincident indicators, (ii) those that look to predict future conditions are known as leading indicators, and (iii) those that follow an economic event and are used to confirm what has recently happened in the economy are called lagging indicators.