Factors That Affect the Forex Market
The Forex Market is a tricky trading arena where many factors come into play. Unlike traditional stock markets, we are no longer just dealing with companies and their future prospects. Rather, the focus is now on the currencies of our world, which can be affected by many factors in each country. I guess you can think of it this way, rather than focusing on the mechanics of particular companies, we will now turn our attention to the mechanics of particular countries. Keep in mind that prosperous economies typically have stronger currencies. With that said, here are some of the different factors that you should take into consideration during your Forex trading.
Trade and capital balances. Since currency exchange rates are all based on the relativity of two countries, it’s important to consider the trade and investment levels between each of them. Generally, whichever country exports more to the other country tends to have a stronger currency. However, when it comes to investment, the country investing more into the other tends to have a weaker currency. This leads us to our next point about interest rates.
Interest rates. As we’ve just mentioned, when companies attract more investment, they tend to have stronger currencies than the foreign nations who are making these investments. This all ties into the level of interest rates since higher rates attract increased levels of foreign investment.
Inflation rates. Inflation has a tendency to devalue a nation’s currency. With that in mind, if a country is experiencing high inflation rates then there’s a good chance that its currency will be devalued compared to other nations experiencing inflation at a lesser degree.
Employment levels. Typically, periods of economic recession can result in major cuts to employment at some companies. These are seen through widespread layoffs since companies are trying to save money and expect consumer spending to decline. At the other end of the spectrum, high employment levels can represent an expanding and prosperous economy. With this in mind, you can look at a nation’s employment levels as an economic indicator.
Gross domestic product (GDP). A second measure that can be used to judge the state of a nation’s economy is its GDP. Given that this essentially measures the level of spending in various areas of an economy, it can help to provide an idea as to whether the economy is expanding or contracting.
Retail sales. Another economic indicator is the general level of retail sales in a nation. This helps to depict the level of consumer spending, which can signify whether the economy is weak or strong. Generally, people spend more in expanding economies since employment levels are also strong.
Political and financial events of a country. One of the most recent and apparent examples of how the political events of a nation can affect its currency is seen through Brexit. Any other political and financial events that create uncertainty surrounding the future of a particular nation will have a negative effect on its currency. The opposite can be true in cases where certain events set a nation on a better path than it was previously on.
As you can see, the Forex market is affected by many interdependent factors and other complexities. There’s no reason to feel overwhelmed though as there are many ways Rich Dad Education can help you reach your goals.
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