Economic factors that drive movements in the foreign exchange market is actually quite simple to understand. This understanding is essential if you want to trade the Forex market successfully.
First, one must understand the fundamental difference between the foreign exchange market and the stock market where most small investors tend to invest. In the stock market, you invest in shares of a given society. If the company expects to do wellin the future, then the share price will rise and vice versa. The stock market is still very sensitive to general economic recession, as in this context, expectations about future earnings of most companies and therefore have reduced their prices fall.
On the other hand, the foreign exchange market is not directly affected by the economic downturn as a recession. This is because, unlike the stock market, pairs trades foreign exchange market two countriescurrencies. Thus, the value in simple terms, if a currency loses its value, then the other money never wins. This means that the investor can make forex trading money, even in the worst recessions. Of course, he or she needs to understand the economic factors that make a currency more precious than its counterpart.
The first factor is the comparative study of economic performance. Say you are trading the currency pair USD / GBP. In simple terms, if the United Statesbetter fulfill the United Kingdom or in other words, if the United Kingdom should have a worse recession than the U.S., then the dollar has appreciated against the GBP. This makes sense because it means that the expectation is that investors prefer to invest in the United States and United Kingdom that the U.S. economy has better prospects than the United Kingdom. Investors move their investment funds in the United Kingdom and those of the United States under, increase the demand for dollars and at the same time selling books and let themarket. The forces of supply and demand in the global foreign exchange market, this means that the value of USD, while the salt GBP down.
The time to go a little "in the more technical details. Interest rates are the most important driver of forex movements. That's because interest rates are the most accurate indicator of health economy of a country. Governments use interest rates as the main tool at their disposal to guide the economy of their country. For example, if a countryand in a recessionary climate, thus stimulating demand and expenditure, the government will cut interest rates to enable people and businesses to borrow money cheaply and thus stimulate spending in the economy . This rising level of expenditure has a positive ripple effect as an expense of income a person of another person and in turn that the person has more income to spend, and so on. This is called the multiplier effect. Conversely, if the economy grows too fast and there is a riskinflation, interest rates are high to reduce costs and encourage more savings, instead, to put a brake on economic growth too fast.
To summarize, governments use interest rates to steer the economy. This is part of the monetary policy of a country. Interest rates are high to encourage saving and reduce spending in the economy, foreign investors that the country more attractive to investors because they can get an interest rate higher than anothercountry. So they will move their investments to a country with low interest rates in a country where interest rates are higher in comparison.
In order to transfer their money to say, country A to country B, they need to buy currency B and, in turn, sell A. Change, as the forces of supply and demand to make their way into the foreign exchange market, currency appreciation against the exchange, A. B So, in summary, the currency of a country with the highest interest rate will be higher than aCountries with interest rates relatively low, as investors move their money from A to B to take advantage of better interest rates for their investments.
In addition to the interest rate on future interest rates expected of a country also have a strong impact on the value of the currency of that country. That's because if investors expect interest rates to fall, they will move their investments to another country, then immediately cause the currency tosold in large quantities, thus reducing the value. Therefore, the tax policy of a government like raising / lowering taxes and national debt, can also assign a monetary value.
We hope that this explanation of a very high level of economic drivers of the movement in currency markets proved to be informative to all those who seek to understand the market exchange of foreign currencies as a small investor.
Leave a Reply