Find out the effect of economic factors on forex trading

Find out the effect of economic factors on forex trading

Find out the effect of economic factors on forex trading
Find out the effect of economic factors on forex trading

Did you know that the average daily turnover of the combined global stock markets is not even close to that of forex trading?

Also, measure your knowledge of the relationship between the stock market and the economy here in our blog vetkat.

The forex or foreign exchange market is the largest market in the world, with a daily turnover of about $5 trillion. Moreover, the forex market is one of the most traded in the world, which includes the participation of many currencies and many individuals.

The forex market is considered the most liquid asset market, and it is highly decentralized with many large players, including central banks, commercial companies, investment banks, and hedge funds involved in the trading.


What we will talk about today:

  • What does the forex market deal in?
  • Forex trading - a profitable form of investment!
  • Factors Influencing Forex Trading

What does the forex market deal in?

The forex market involves the conversion/exchange of currencies within a wide network of buyers and sellers at an agreed rate, which is also referred to as foreign exchange trading. The vast majority of currency conversions are made every day in the global market with the aim of making a profit.


Most of the trade in the forex market takes place between the currencies of the eight countries - the United States, Japan, the Eurozone, Switzerland, the United Kingdom, Canada, New Zealand, and Australia.


Read Also: Here are 7 reasons why you should invest in forex trading

Forex trading - a profitable form of investment!

Forex trading has quickly become a popular form of investment among modern investors, who consider it a reliable platform for making money. Let's go through some of the features of forex trading that make it an attractive form of investment:


Flexibility 


Forex trading provides time flexibility to traders because it includes the exchange of global electronic currencies and operates 24 hours a day. The flexibility of time allows traders to enter or exit the market as they wish.


Liquidity 


The forex market is known to have great liquidity, as many forex traders seek to make buying and selling deals at certain times. This allows them to complete all their transactions as quickly and easily as they desire, and also at a low transaction cost.


Low Risk


The risks associated with the forex market are relatively low as novice traders can invest a small amount of money to start forex trading. This prevents huge losses for novice investors who first want to examine the market.


Decentralization 


Since the forex market is a decentralized market, no single institutional trader can control the exchange rates for an extended period of time. With no forex brokers in between, the market is affected by the economy itself, not by a single company or person.

Factors Influencing Forex Trading

Find out the effect of economic factors on forex trading 1
Find out the effect of economic factors on forex trading

Although forex trading has many and many advantages, before one gets involved in forex trading, one must be aware of the factors that influence the market movement.


Interest rates


The movement of exchange rates between countries of the world is affected in a way by the interest rates decided by global central banks, and this has a close relationship with Forex trading.

Usually, the promotion of high-interest rates in the value of a country's currency compared to other countries with low-interest rates, affects forex trading, as most foreign investors prefer to invest in the country that has higher interest rates with higher rates in order to achieve the best returns.

For example, if the value of the Australian dollar fell on the first move to cut interest rates for the Reserve Bank of Australia in June 2020. It is important to know that the bank has cut the current interest rate from 1.5 percent in May 2020 to 0.75 percent. You will find the drop of AUD/USD from ~0.73 USD in January 2020 to ~0.68 USD, this example is useful in learning forex trading.


Inflation


The meaning of high inflation is that the cost of consumer goods is high in the country's economy, which causes foreign investors to not invest, which leads to a decrease in the demand for and value of that country's currency.

For example, after Australia announced better-than-expected inflation figures for the second quarter of 2020 in July 2020, the Australian dollar strengthened, and Reserve Bank inflation rose by 1.5 percent. by 1.5 percent.

However, it should be noted that a policy of a very low level of inflation does not guarantee the state an advantageous exchange rate.


Unemployment rate


The unemployment rate is important for the economic situation of any country, as it affects the movements of foreign exchange rates in the country's forex markets and the stability of its currency in the forex trading process. Policymakers use unemployment rate statistics to study and identify which sectors are losing jobs most quickly. 


Furthermore, knowledge of the unemployment rate provides forex traders with clues about expected monetary policies in the future economic stability of the country in which forex is traded.


Note that: A rise in unemployment is often very negative for the local currency and usually leads to bearish shifts in Forex, while a decrease in unemployment leads to upward shifts.

Read Also: Learn top 3 profitable forex trading strategies

For example, the Australian dollar rose on December 20, 2020, as a result of an unprecedented drop in the unemployment rate in the country.


Economic growth


Economic growth is that indicator that is widely used to make a comprehensive assessment of the capacity of a country's economy. Where economic growth holds great potential to influence the movement of the forex market because it is the best measure to ascertain the country's position in forex trading.

Because it takes so long to publish GDP data, its effectiveness as a forex trading tool in the short and medium-term is limited.


Current account balance


Trade balance affects the supply and demand for forex trading, which directly affects the exchange rate of currencies.

He noted that if the country's exports exceed imports, this reflects the rise in demand for the country's goods, which thus leads to a rise in demand for the country's currency. In other words, an increase in the demand for a country's goods causes prices to rise, which in turn leads to a rise in the value of the currency.


State government debt

It is a well known fact that the government debt in the country has a direct and obvious impact on the forex market. A country with high government debt is usually one of the least attractive to foreign investors. In other words, the country's high debt without a reliable plan to address it will lead to a devaluation of the currency, and this affects forex trading directly.


We have seen above that the country's economic factors have a great influence on forex trading; However, it should be noted that the currency exchange rate also significantly affects the country's economy through its effect on trade flows between forex partners. Hence, a trader's proper knowledge of the relationship of exchange rates and a country's economy is essential before indulging in forex trading.

For more information: