The volatile nature of the foreign exchange space is one of its most talked about traits, and as an investor, it’s ideal to know what lies at the other end of this volatility.
These are factors that influence price actions, liquidity, and profit potentials of currency pairs in the market. They mostly involve macroeconomic statistics, government policies, and others that we’ll discuss below to show you how to harness these external elements for better performance and profitability.
Economic Factors Influencing Forex
The forex market is built on the concept of exchanging one currency for the other. So, it comes as no surprise to see how much it is affected by macroeconomic factors. The economy is one of those indicators with the greatest effect on currency performances because the relationships are directly proportional. With indicators ranging from inflation to exchange rates, Gross Domestic Product (GDP), inflation, unemployment rate, and others, it’s easy to estimate how attractive a country is to foreign investments.
The logic is simple. A higher-than-expected GDP report may strengthen the position of a country’s value in the exchange market. Better GDP reflects a better production rate, and a heightened demand for the country’s products and currency, pushing investors’ interest in its currency. When the currency appreciates in value, traders holding such pairs tend to make more profits while the uptrend remains. Conversely, bad economic performances are likely to drive some price values down and lead to losses.
Other factors, like employment rate and inflation, often have direct impacts on individual purchasing power and demand for goods and services, which could extend into several industries, including the investment markets.
Political and Geopolitical Influence
Political factors also impact these assets. The recent Trump victory is a practical example of such a scenario. The GBP/USD exchange rate has been holding up well over the last few weeks, with political events like the Donald Trump election and the ongoing central bank decisions from the Bank of England and the Federal Reserve. However, there were significant changes in the US dollar performance following Trump’s victory. The dollar soared to a four-month high, advancing 1.25% higher than its major peers. This can be attributed to information Trump revealed during his campaign, like the immigration policies and tariffs.
Even without the promises being actualized, the difference in the dollar’s performance against other currencies is clear. This goes to show how relevant political influence can affect foreign exchange. Aside from political events, government policies, laws, and news also affect the market. This includes interest rate policies, open market operations, and other monetary decisions, demonstrating why most foreign exchange platforms have features that make economic news and events accessible at all times; they could make or break an investor’s trades.
The Capital Markets
The capital markets are financial systems that bring buyers, sellers, and other key stakeholders together to trade instruments. Other markets, like stocks, bonds, and commodities, are a part of this system, and they also have some influence on exchange rates. Why? The direction of other investments shows the economic outlook of the country as a whole. A rise or sell-off in securities shows the current positioning of the investment market and influences trade decisions, profits, and potential losses. These instruments also have much in common and are likely affected by the same rules. For instance, the bond market and forex space are heavily reliant on interest rates. If you’re about to start forex trading, it is important to understand other instruments and how they influence and affect the trajectory of the everyday forex trader.
Market Sentiment
The supply and demand dynamics in forex are heavily reliant on market sentiment. Supply refers to the number of available assets, while demand is the quantity that people are willing to buy. Speculative activities and ongoing investor sentiment can create short-term fluctuations in both supply and demand drive. Simply put, positive sentiment can lead to an increase in demand and better performances in your trades. On the other hand, a negative one can have the opposite effect on your position.
Mastering Key Drivers of Profitability in Forex
Every aspect of this article impacts trade decisions and the results you’ll get while investing in currencies. Understanding them and how to make the most of them will make such a difference. To maximize economic news and indicators, use advanced trading platforms that give notifications on these events. You can get screen pop-offs or subscribe to websites that publish the latest news on happenings around the world. By staying informed and following the trend, you’re one step closer to better results.