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Factors that Affect Forex Market

Factors that Affect Forex Market

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Factors that affect Forex market

There are some factors that affect forex market:-

  1. Central bank’s interest rates.
  2. Inflation,
  3. Economic growth.
  4. Geopolitical stability.
  5. Terms of trade.

Central bank’s interest rates

The simple answer is that it encourages international investors to pour money into countries in order to share in the profits. Interest in a country’s currency rises as interest rates rise. When a country boosts interest rates for a long time, it might produce a broad trend versus other currencies.

Role of inflation

  • Inflation is an excellent indicator of a country’s current account balance. Inflation is the rate at which the price of goods and services changes over time.
  • Low inflation is thought to be beneficial to a country’s economic progress, whereas excessive inflation is thought to be harmful.
  • When a country’s inflation rate is high, the cost of consumer goods rises, resulting in fewer foreign consumers (and hence less foreign currency), and the country’s trade balance is disrupted. Less demand for the money will eventually result in a decrease in its value.

Economic growth

  • One of the indicators to which the financial media pays the most attention is economic growth.
  • This is understandable, given the continually poor and low economic growth, which raises the likelihood that the central bank may decrease interest rates or perhaps initiate QE.
  • A persistent high rate of GDP growth, on the other hand, has the ability to boost the projected rate of return from money market accounts, real estate investments, and stock dividends. This increases the currency’s appeal to potential investors.

Geopolitical stability

  • Market data indicators aren’t the only accurate economic indicators for foreign exchange. The impact of large geopolitical events on currency movements can be enormous.
  • People choose safe havens and liquidity in times of global turbulence and crisis, both of which often boost the USD.
  • One recent example is the performance of the GBP/USD currency pair. The pair was at 1.30 at the start of March 2020, but as the coronavirus crisis worsened, it fell below 1.15 in two weeks. In FX markets, such strong fluctuation in such a short time period is unusual; yet, in times of crisis, people are more concerned with safety than with larger returns.

Terms of trade

If a country’s export prices rise faster than its import prices, its terms of trade improve. This leads to increased revenue, which in turn leads to increased demand for the country’s currency and a rise in its value. As a result, the exchange rate appreciates.

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