Forex, or foreign exchange market, is a global marketplace that represents different currencies through a significant volume of interconnected transactions. As a result, there are a myriad of factors affecting Forex market or currencies, from the smallest news to global economic and political developments.
The value of other currencies will be impacted by factors that affect a strong currency like the USD. To help you pay attention when reading news articles on Forex Factory or other websites to forecast prices, FXCE has listed the key elements and factors affecting Forex market in this post.
1. Political Factor
Politics is a crucial component of the factors affecting Forex market because there is a direct tie between them and economics. The economy and the value of money will both suffer from an unpredictable political climate since investors tend to pull their money out of markets with high volatility.
A country's change in leadership can have an impact on its economic policy in addition to the general circumstances, especially for "leaders" like the UK, the US, or Europe.
The most obvious example is how during the Russia-Ukraine war, the Euro significantly depreciated due to disputes between Russia and the European Union (EU). Similarly, perhaps the Brexit event in 2016 used to cause quite a bit of trembling in the forex market.
2. Gross Domestic Product
Because it demonstrates the total commodities and services generated in a nation, or, to put it another way, the size of an economy, GDP data is also regarded as one of the factors affecting Forex market.
High GDP growth rates are also indicative of rising productivity and consumer demand for goods and services. A rise in a nation's production of goods and services increases demand for that nation's currency on the foreign exchange market.
In general, a country's currency will be stronger the faster its growth rate is. This also encourages international investors to pour money into investments, which raises the amount of foreign money and strengthens the domestic currency.
3. Interest Rate From Central Bank
In terms of indices, interest rates are considered to be one of the most important factors affecting Forex market. Theoretically, a currency will typically appreciate when central banks foresee higher interest rates, while a currency would typically devalue when they predict lower interest rates.
This comes from the fact that central banks can raise interest rates to either encourage corporate activity or to slow down the economy. Long-term traders can predict changes in interest rates and the return on interest rates by monitoring the economic situation in a particular nation.
4. Inflation Rate
The inflation rate is of particular relevance to traders if interest rates are a key in factors affecting Forex market since it is the most obvious impact of an increase or drop in interest rates. Currency pairs always see high volatility when inflation news is released.
There will always be a target inflation rate that central banks, most notably the Fed, need to keep an eye on. They must adjust if inflation is either too high or too low in relation to expectations in order to stabilize the economy.
A small amount of inflation will be considered good for the economy, but if it is too high or too low (deflation), it will easily lead to a decline in economic activities. Traders can try to predict inflation figures by following changes in the prices of commodities and key raw materials such as aluminum or crude oil. The same goes for tracking related indexes such as the consumer price index (CPI) and the manufacturing index (PPI).
>> One of the symptoms of inflation is the down going of S&P 500 index written here: S&P 500 Index: What Is It For And How Important Is It In The Market
5. Other Economic Factors Affecting Forex Market
In addition to the factors affecting Forex market commonly seen above, there are factors that are less concerning but still have a more or less impact on currency pairs.
The unemployment rate is one metric for economic health. The high unemployment rate indicates that businesses' market activities are being curtailed for some reason, which in turn lessens import and export and creates a shortage of foreign currency due to the inability to collect it and depreciates domestic currency.
Terms of trade
The terms of trade, which compare export prices to import prices, has an impact on current accounts and the balance of payments. A country's terms of trade have improved favorably if the price of its exports grows faster than the price of its imports. Growing terms of commerce indicate increased demand for the nation's exports.
In turn, this leads to a rise in export earnings, which raises the value of the local currency and increases demand for it. The value of the currency will fall in comparison to its trade partners if the price of exports increases at a slower rate than the price of imports.
Nations will utilize significant deficit finance to fund public projects and governmental spending. While this activity boosts the local economy, international investors are less likely to invest in countries with large public deficits and debts. Because the large debt promotes inflation, and if inflation is strong, the loan will eventually be serviced and repaid with real dollars that are less expensive.
In worse cases, a government may issue currency to partially pay off a big debt, but expanding the money supply invariably results in inflation. Also, a government must increase the number of securities available for sale to foreigners in order to lower the price of those assets if it is unable to finance its deficit through selling domestic bonds and expanding the money supply.
Finally, if foreign investors think the nation might default on its debts, a high debt may worry them. If there is a high chance of default, foreigners will be less eager to purchase securities denominated in that currency. Because of this, the country's debt rating plays a significant role in determining its exchange rate as well as one in many factors affecting Forex market.
6. Uncontrolled Factors Affecting Forex Market
Factors affecting Forex market also contribute from causes that we cannot control. It could be any of the following causes:
War: Leads to destruction of material assets and substantial investments, loss of life and property, and loss of jobs, consumption of petroleum products, metals into the implementation of weapons.
Environment: Climate change in some regions makes specific products change or disappear, affecting export output and regional economy.
Natural disasters, epidemics: Sudden loss factors will lead to restricted movement activities and slow down economic activities.
In the unlikely cases, gold seems to be the ideal investment asset, so traders can refer to the currency pair with the symbol XAU to make a profit.
>> Factors from natural disasters, war are the main cause of long-term price decline of the whole market in this article: What Is Bearish? Things To Do In Bearish Market
There are many factors affecting Forex market in general. Most come from economic indicators, the rest are political factors or external issues. Catching the above issues in updating news will help you have a better judgment of the price line.
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