The Purpose of Trading

Whether referencing the Brexit Referendum of or leadership contests in the US, UK, or Japan, the impact on the world market after an election can be substantial. One of the best ways to accomplish this goal is through referencing an economic calendar. The daily calendar lists the key events and times for each release, making it easy for the active forex trader to keep track of all pertinent information. When it comes to leading forex market drivers, monetary policy is perhaps the most important. Generally speaking, an unexpected interest rate increase benefits the underlying currency, while a surprising rate cut tends to lead to weakness in the currency in question.

Essentially, higher GDP figures represent more economic output, while lower values suggest less activity. While critical for assessing the overall health and power of a nation, GDP figures may not lead to dramatic market moves as the data is typically released more than a month and often two or three months after the relevant time period. High unemployment rates typically accompany recessionary cycles and sluggish GDP growth, while low rates signal robust economic performance.

Inflation measures the rise in consumer and producer prices. Central banks primarily seek to manage inflation by raising interest rates, which can limit the impact of currency devaluation. Both inflation and unemployment are key areas of focus for central banks, so the ensuing market reaction is often viewed through that lens. In other words, higher-than-expected inflation and lower-than-anticipated unemployment figures suggest that the central bank may be more likely to raise interest rates, leading to strength in the underlying currency and vice versa. By monitoring how the forex market reacts to surprises in these key economic releases and others, traders can develop strategies to take advantage of the ensuing volatility and trends.

In contrast to most economic factors, geopolitical market drivers typically arise less frequently. Each had a profound impact on forex trade through enhancing volatility. As the chart below shows, market movement tends to increase around significant events, especially when those events represent negative surprises:. The following geopolitical factors are critical to forex price action. They all have the potential to drive forex valuations directionally, at the drop of a hat.

In fact, books have been written about the positive and negative impacts on the world market after an election cycle. As we noted above, the surprise passage of the Brexit Referendum placed extreme pressure on the British pound sterling GBP. Amid the uncertainty, the pound fell to levels not seen since Hurricanes, earthquakes, and wildfires rear their heads unexpectedly and can have severe financial consequences.

As an illustration, the Australian brush fires of late and early had dramatic economic and currency market impacts. With damages estimated to measure in billions of Australian dollars, the Reserve Bank of Australia RBA quickly adopted a more supportive policy. Subsequently, a series of RBA rate cuts sent the Australian dollar significantly lower vs the US dollar, highlighting the interplay between economic and geopolitical events.

Wars, terror attacks, and pandemics can have a devastating impact on the economies and currencies of affected nations. One of the premier examples of a global humanitarian crisis is the novel coronavirus COVID pandemic of Designed for currency market participants of all sizes, Forex. For more information on selecting an account type that is right for you, get in touch with our team today! Empowering the individual traders was, is, and will always be our motto going forward.

Contact us: contact actionforex. Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information. Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. The increased demand for the Australian dollar will put upward pressure on its value.

On the other hand, countries with large trade deficits are net buyers of international goods. More of their currency is sold to purchase the currency of other nations to pay for foreign goods. This type of situation is likely to have a negative impact on the value of an importing country's currency.

Foreign exchange market

The political landscape plays a vital role in the overall outlook for a country and, consequently, the perceived value of its currency. Forex traders are constantly monitoring political news and events to anticipate changes in the economic policies of national governments.

• What Economic Indicators Are There?!
• Purchasing Power Parity and Inflation.
• forex y bolsa de valores.

These can include shifts in government spending and adjustments in regulations imposed on particular sectors or industries. Changes in rules regarding margin or leverage available to traders often have a dramatic impact on markets. Elections with uncertain outcomes are always significant events for currency markets.

Exchange rates often react favorably to wins by pro-growth or fiscally responsible parties. A referendum can also have a substantial impact on exchange rates. A good example is the Brexit vote, which had a dramatic effect on the British pound when the U. The fiscal and monetary policies of any government are the most critical factors in its economic decision making. Central bank decisions that impact interest rates are keenly watched by the forex market for any changes in key rates or the future outlook of policymakers. Economic reports are the backbone of a forex trader's playbook.

The Economic Importance of Currency Markets

Maintaining an economic report calendar is crucial to staying current in this fast-paced marketplace. Gross domestic product GDP may be the most visible economic statistic, as it is the baseline of a country's economic performance and strength. GDP measures the total output of goods and services produced within an economy. However, it is crucial to remember that GDP is a lagging indicator. That means it reports on events and trends that have already occurred. Inflation is also a significant indicator, as it sends a signal of increasing price levels and falling purchasing power. However, inflation is a double-edged sword.

Many view it as placing downward pressure on a currency due to retreating purchasing power.

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Inflation can also lead to currency appreciation, as it may force central bankers to increase rates to curb rising inflation levels. Inflation is a hotly-contested issue among economists, and its effects on currencies are rarely straightforward. Employment levels, retail sales, manufacturing indexes, and capacity utilization also carry important information on the current and predicted strength of an economy and its currency. They can provide confirmation for the primary factors we've outlined above.

The forex market is ultimately driven by economic factors that impact the value and strength of a nation's currency. The economic outlook for a country has the most influence on the value of its currency. Knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex.

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What Moves Forex Prices?

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Macroeconomic statistics, such as inflation, have the greatest impact on forex markets. Stock, bond, commodity, and other capital markets also have a strong influence on exchange rates. International trade numbers, such as trade deficits and surpluses, play a vital role in forex markets.

Political news can also be important for forex traders, especially when unexpected outcomes occur. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts.