Economic factors that influence the currency exchange market
At Earnex, we understand how important it is for you to be well informed. Therefore, we will present you with essential information about trading and its terminology in a sequence of articles. In this, article we will focus on economic factors that affect the market, focusing on the currency exchange market.
The currency exchange market or Forex is the largest of the financial markets trillions of dollars exchanged each day. Several factors influence the market fluctuation, which means that traders need to know them to make balanced decisions when building their trading strategies. Here are the essential ones:
Global economic factors widely influence the forex market. The strength of the national economy is primarily effecting the value of its currency. Global economic health depends on current events and news.
Capital markets are a good indicator of the economy’s health. For example, a scheduled release of public information about the country’s state immediately impacts the movement on the markets. Some currencies like the Canadian dollar are directly influenced by changes in crude oil and metals markets. Therefore, if traders are planning to open a position that includes the Canadian dollar, they should pay attention to these commodities markets’ movements.
Similarly, the bond markets also influence the forex market. The fluctuation in the price of the government bonds is a factor in the move of the exchange rates, and as a trader, you need to understand how governments bonds are traded too.
The trade balance between the countries is another important factor. It represents the demand for goods from a country. If a country has a high demand for its products and service internationally, it will positively boost its currency price. For example, buyers need to convert capital to buy specific goods from one country. That will increase the demand for their currency hence drive its value up.
Trade deficits, on the contrary, has a negative impact on the currency price. Countries that need to sell more of their currency to buy other nations currency and respectively goods will likely fall into trade deficits, and the price of their currency will fall.
Politics and economics are strongly connected. The political situation in one country is essential for the value of its currency. Therefore, professional forex traders are constantly following the current political events, which will help them perceive the upcoming currency exchange market changes. A good example is a vote for Brexit and the dramatic effect of the announcement of the UK’s decision to leave the EU on the British pound.
Economic reports are the morning read of every sophisticated trader. To able to monitor all events vital to them, traders use the help of economic calendars. (more about them read here). Among the different economic statistic, the Gross Domestic Product (GDP) perhaps is the essential one. The announcements of a country’s GDP have always impacted its currency’s value as they indicate the nation’s economic health.
Other such vital announcements are employment levels, inflation rate, retail sales, manufacturing indexes and capacity utilisation.
In conclusion, the currency exchange market is driven primarily by the economic factors influencing the value of a nation’s currency. Understanding and following them will help traders to build their trading strategies more effectively.