Economic Factors Influencing the Forex Market
In the forex market, buyers and sellers from all over the world participate in trading until the forex market transactions reach trliyun dollars every day. This proves the fact that forex trading has become a global activity that makes it a macroeconomic event so that it plays a bigger role in the previous forex conditions. Here are some economic factors that affect the forex market.
The role of macro economy
The forex market moves by macroeconomic factors that affect the decisions of traders to finally determine the value of the currency at a certain level at a certain time. The economic health of a country is also an important factor in shaping the value of its currency. The overall health of the economy is shaped by several dynamic economic and information events each day. Contribute in 24/7 forex market.
The global capital market is the most visible indicator of a country’s economic health, while bonds and stock markets are the most influential markets in the world. Given the constant media coverage and information on corporate transactions, agencies and government agencies, no public information is missing from the capital market. Rallying or selling of securities from one country to another should be a signal that future (long or short) prospects for the economy are clearly visible to investors.
Like Canada whose currency is commodity-based. Canadian dollar is heavily influenced by commodity movements such as crude oil. An increase in oil prices could potentially lead to a relative appreciation of the loonie (the term for the Canadian dollar) against other currencies. Commodity traders, such as forex traders, are heavily dependent on economic data for their trading, so in many cases the same economic data will have a direct influence on both markets.
In addition, the bond market is also very important for what is happening in the forex market, since bonds have a fixed income and are heavily dependent on interest rates. The movement of the value of government bonds is the first rate factor in currency movements. This means that if there is a change it will directly affect the value of the currency. Because both markets (bonds and forex) is very closely related and very important to understand the movement of bonds in order to have a high profit opportunities as a forex trader.
Another factor is the balance between the level of trade between countries. The level of trade between countries represents the demand for goods from a country. A country that gets high demand for goods or services in international trade usually its currency will appreciate. For example, to buy goods from Australia, buyers must convert their currency into Australian dolla (AUD) to make a purchase. Increased demand for AUD will place an upward push.
Trade surplus and deficit illustrates the occurrence of competitive conditions of a country in international trade. Countries with large deficit trade are buyers or importers of international goods. Situations like this tend to have a negative impact on the currency value of an importer country.
A country’s political map plays a major role in the economic outlook for the country and the consequences are seen in the value of its currency. Forex traders continue to monitor news and political events to gauge the potential for price drivers, if any.
Elections (change of national leadership) is always a big event for the currency market. Currency exchange rates will often react to potential government parties with responsible fiscal platforms and are willing to provide economic growth solutions. Like the example of Brexit Vote, which until now had a major impact on the British pound (GBP) when Britain decided to leave the European Union. The British currency hit its lowest level since 1985 after the Brexit Vote outcome because of the sudden outlook for the UK economy is very uncertain.
The government’s fiscal and monetary policies are also the most important factor in economic decision-making. Central bank decisions that impact on interest rates are always noticed by forex market participants.
Economic Data Release
The report or the release of economic data is the backbone and a reference forex traders. As an example is GDP data. It is the most obvious economic report, because it is the basis of the strength and economic performance of a country. One important thing to remember, however, GDP is a lagging indicator, which means that it reports the events and trends that have occurred.
The measure of inflation is also a very important indicator because it provides a signal of price strengthening and falling purchasing power. However, inflation is a double-edged sword. It could mean pressure on the currency because of declining purchases. On the other hand, it can also lead to a boost in currency as it may force the central bank to raise interest rates to control inflationary increases.
Other reports such as job rates, retail sales, manufacturing indices and capacity utilization also carry important information on current strengths and forecasts for the economy and its currency.
The forex market is driven by an economic factor that is an indicator of the economic strength of a country. A country’s economic outlook is the most important determinant of the value of its currency. It becomes important for traders to pay attention to economic factors.