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The forex market is extremely dynamic, fast-paced and in a continuous state of flux. Its prominent usage by millions of traders across the globe means that it is one of the most unique and liquid markets in the world.
The unremitting fluctuations in currency values across the market are a result of a number of factors and as a forex trader, it is essential that you consider these factors before placing your trades. Some of the most fundamental factors that affect the forex market include:
Economics
The forex market is influenced by the economic circumstances occurring in a country at any given time. Through government fiscal and monetary policies (including news about budgets and spending habits, as well as supply and demand of a currency), currencies automatically rise or fall in value, thus having a direct impact on the forex market.
Further economic factors affecting the market include production, international trade, and economic health. The release of employment and trade balance figures, inflation numbers, GDP and retail sales are all hugely influential on a country’s currency and subsequently, on the forex market.
Politics
When trading forex it is important to consider the political circumstances surrounding the currencies that you are trading. If you are largely trading with the US dollar, then it is essential to keep afloat of any major political events, including elections, budget meetings and political uncertainty occurring in the USA. Such activities often have a direct impact on the value of the dollar and therefore on your forex trading.
Psychology
Additional factors affecting the forex market include marketing psychology and trader perceptions. For example, during the major international turmoil, many traders tend to flock to more typically ‘safe haven’ financial instruments, resulting in a greater demand for those currencies.
Economic Growth Expectations
When forecasting the trends of a country’s currency you should look at the country’s economic health and its activities. You need to check the country’s economic indicators such as inflation, gross domestic product (GDP) growth, interest rates and international trade deals, which are all hugely influential on a single currency, and subsequently on the forex market.
Conclusion
Traders use such figures in an attempt to predict price fluctuations. By analyzing such movements and watching forex market news, they can gain a clearer grasp on which direction a currency is heading in, and use this information to influence their forex trading success.
