Understanding the Factors that Influence the Forex Markets
Even the most experienced forex investor must acknowledge the complexities of the currency markets. Highly complex, they present an intricate and incredibly complicated challenge for those who attempt to unravel them.
One of the most common analogies used to describe the forex markets is a spider web, and it’s easy to understand why. Like the most painstakingly crafted weave, the overall picture the markets depict is created from a thousand interwoven strands, each one of them contributing in its own way to the whole.
These strands are market drivers, the factors that affect the forex markets, and there are hundreds of thousands of them capable of impacting currency trends and patterns, some more influential than others. To help you identify the most important of them, here’s a brief analysis to assist you…
Even the most inexperienced investor will understand that appreciation in one of the currencies they trade is something to take note of, but when you’re studying the markets to try and identify emergent trends, you’ll also need to look at the patterns evident in other currency markets. The currencies of countries that trade with each other, or have close social ties, can be directly impacted by one another, and in the same vein, you’ll find that appreciation of currencies in one rival economy could well drive down the value of another.
In the case of depreciation, there is little to add to the explanation given above, and the effects described will be the same, although in reverse. However, you may also discover that depreciation in one currency can cause traders to flock to others, in the hopes of balancing their portfolios. These so called ‘safe haven assets’ often thrive when other currencies suffer, so if your interests will be affected by their value, it’s worth being aware of any upheaval impacting more volatile currencies, as this could work in your favour.
#3: Financial Decisions
Economic calendars are a tool frequently used by traders to apprehend market movements, and many of the events that they detail relate to financial decisions from various central banks. These can severely impact the value of a currency, for either better or worse, so it’s always worth being aware of any impending financial decisions that could influence your pairings in one way or another.
#4: Economic Trends
Like financial decisions, economic trends are often used as a means of unraveling a country’s monetary outlook, and this means that traders pay a lot of attention to them. Falling production, slowing wage growth, struggling industries, and so on are all taken as indicators of a poor future financial performance, and will often drive down a currency’s value. Conversely, where a country puts in a strong economic show, its currency will usually thrive.
#5: Social Movements
Social movements can heavily impact a country’s economic and financial performance, so don’t make the mistake of underestimating them. Rising unemployment, lack of faith in a government, or even a growth in popularity of a particular brand or product produced domestically can all influence a currency’s value, and can often catalyze new economic and financial drivers that can affect a pairing’s worth.
#6: Political Decisions
You’ll also want to keep an eye on the political landscape of any countries whose currencies you trade. A decision to go to war, growing dissatisfaction with government policy implementation, an exchange of power from one party to another, and so on can all influence how a nation’s financial future is assessed, and could massively impact the currency combinations that you’ve invested in.
#7: Natural Disasters
Even natural disasters can influence the value of national currencies. Earthquakes, floods, volcanic eruptions, and so on can be extremely damaging to domestic industries, and this in turn often affects a country’s financial performance. Damage to buildings, homes, production plants, and more often has an extreme economic effect, and investors can be quick to lose faith when fortune shows its hand.
#8: Trends Affecting Other Financial Markets
The currency markets do not exist in isolation, and one factor that many investors fail to account for is the impact that other markets can have on a country’s financial performance. The recent and severe damage to a number of major European stock markets had a marked influence on a variety of currencies, including both the pound and the euro. This in turn had a knock-on effect on their major trading partners, and helped to bolster the fortunes of those countries that were unaffected. Thus, even where such events don’t directly impact the nations that you’re concerned with, they can still play a part in determining your own financial future.
You’ll also find that supply and demand, and both shortages and overproduction of raw materials, can influence the forex markets. Many countries are heavily reliant on particular industries to supply metals or other essentials to the rest of the world, and when these industries are impacted, this can have an extreme influence on currency values. The soon to be shortage of steel is a prime example, with many suggesting that an increased demand for it may well prove to be the surest fix for the ailing Chinese economy, and the saviour of its currency.
#10: Investor Sentiment
Finally, don’t discount simple investor sentiment. Any of the above influences could be enough to predicate market movement, and sometimes it is surprisingly minor drivers that have the largest influences. This comes down to investor sentiment. Irrespective of the actual financial impact of a market driver, if traders perceive it to be a great enough threat, the value of a currency will decrease. Similarly, even the slightest sign of economic strength, for example, can drive prices up, provided that it gives investors the faith that they need.
The forex markets are known to be tough, and there is no denying that learning to decipher them is an art form in and of itself. For those who can master it, herein lies the key to currency trading success, and above are some of the clues that you’ll need to help you unlock the puzzle.
Why not contact a broker like ETX Capital now, and try your hand at trading today?