Fundamental analysis is is the use of news events and economic data usually released by the central banks or governments to predict how the market will move. Generally when a county has good news or good financial data this will increase the countries currency value due to more people and businesses wanting to invest in that country, this will also increase growth which can eventually lead to inflation, central banks will then increase interest rates to combat high inflation increasing the currency value even more. The opposite happens with events or data which is negative for a countries growth, lowering the currencies value.
Knowing how fundamentals effect a currencies value is an important tool when trading forex and can also help avoid major swings in the market when volatility is high. It always pays to have an idea of a countries economic outlook and any major events due for release before trading a currency. When trading fundamentals its best to look at the expected outcome, for example if unemployment falls this should mean the currency increases but this could cause the value to fall due to unemployment not falling as much as expected this is due to the expected news already being priced in.