In the following scenarios, we’ll use some fundamental analysis to help us decide whether to buy or sell a particular currency pair.
Exchange rates alter as a result of fluctuating supply and demand for a currency, which is impacted by a variety of economic factors.
Every nation has its own currency (or region). The FX basic study focuses on the overall state of the economy, including productivity, employment, manufacturing, global trade, and interest rates.
In this case, the euro, which is the fundamental currency, acts as the “basis” for the buy/sell.
If you believe that the U.S. economy will continue to suffer, which is bad for the U.S. currency, you would place a BUY EUR/USD trade.
You took this action in the anticipation that the euro would appreciate against the dollar.
If you believed that the US economy was strong and that the value of the euro would drop in relation to the US dollar, you would place a SELL EUR/USD order.
You sold your euros in expectation of a drop in the value of those currencies in relation to the US dollar.
The U.S. dollar buy and sell acts as the “basis” for the buy/sell in this instance.
If you thought the Japanese government would devalue the yen to boost its export economy, you would place a BUY USD/JPY order.
By doing this, you’ve bought US dollars on the anticipation that their value will rise in relation to the Japanese yen.
If you believed that Japanese investors were withdrawing their money from American financial markets and trading all of their dollars for yen, which would be bad for the US currency, you would place a SELL USD/JPY order.
Since the pound is the fundamental currency, it acts as the “basis” for the buy/sell in this scenario.
If you thought the British economy would expand faster than the US economy, you would place a BUY GBP/USD order.
You did this in the anticipation that the value of the pound would rise in relation to the US dollar.
If Chuck Norris believed the British economy was deteriorating but the American one was still robust, he would place a SELL GBP/USD order.
In anticipation of a drop in their value in relation to the dollar, you sold pounds.
By doing this, you’ve sold US dollars in anticipation of their value declining in relation to the Japanese yen.
How to Trade the USD/CHF Exchange Rate
Since it is the primary currency, the U.S. dollar buy sell acts as the “basis” for the buy/sell in this instance.
If you decide to purchase USD/CHF because you think the Swiss franc is overvalued.
You did this in the anticipation that the US dollar would appreciate in value relative to the CHF.
If you thought that the U.S. housing market’s decline would impede future economic growth and weaken the dollar, you would place a SELL USD/CHF trade.
You took this action in anticipation of the American dollar depreciating against the Swiss franc.
The following examples demonstrate how we can use fundamental analysis to determine whether to buy or sell a specific currency pair.
You would place a BUY EUR/USD trade if you think that the U.S. economy will continue to deteriorate, which is terrible for the U.S. currency.
You would place a BUY USD/JPY trade if you believed that the Japanese government would depreciate the yen in order to help its export-based economy.
The pound serves as the “base” for the buy/sell in this situation because it is the fundamental currency.