The foreign exchange market is comprised of currencies from nations all over the world. Given the unique and complex nature of each and every economy around the globe, it is an impossible task to identify all the factors that drive currency prices.
However, the factors that are listed below will give you a good starting point for gaining an understanding of the type of factors many would consider the primary drivers. First, an over simplified concept that is important to understand is that capital flows into economies that are considered safe, stable and growing.
These reports are usually published periodically by governmental agencies or private organizations. Although there are numerous policies and factors that can affect a country's performance, the factors that are directly measurable are included in economic reports.
Many even highlight announcements based on their likelihood that they will impact the exchange rate. Here are some of the most common economic releases that investors pay attention to:. GDP is a report that outlines the monetary value of all the finished goods and services produced within a country during a specific time period.
GDP is one of the most watched metrics in forex trading because it is a clear indicator as to whether an economy is growing or shrinking and how much it is changing relative to the opinion of analysts. Non-farm payroll figures refer to any job in the economy with the exception of farm work and other situations such as those employed within the military and intelligence agencies. This release holds such influence because it provides a gauge for investors in determine whether corporations are hiring.
When reports suggest that non-farm payrolls are improving and strong, it can be interpreted to mean that the companies are growing and that newly-hired employees have money to spend, which will in turn fuel broad economic growth. Growing workforces and a strong economy will often lead to a strengthening currency.
The report estimates the total merchandise sold by taking sample data from retailers across the country. Because consumers represent more than two-thirds of the economy, this report is very useful to traders to gauge the direction of the economy.
Also, because the report's data is based on the previous month sales, it is a timely indicator, unlike the GDP report which is a lagging indicator. One of the closely watched measures included in this report is the capacity utilization ratio which estimates the level of production activity in the economy. It is preferable for a country to see increasing values of production and capacity utilization at high levels. The PMI figure is calculated based on five major indicators: The primary purpose of this indicator is provide investors with a snapshot of the state of the manufacturing sector and whether it is expanding or contracting.
These economic releases are not the only factors to watch. There are also several meetings around these events that provide quotes and commentary, which can affect markets just as much as any report. Strong stock markets are often indicators of strong and growing economies, which in turns leads to increased foreign investment and demand on the currency. The performance of major global financial markets is a key indicator used by forex traders.
Persistent trade deficits are closely watched because they can put a nation at risk or future currency devaluation. Varying interest rates among lenders in different nations is one of the primary drivers of currency prices. This concept is discussed in more detail later on, but at this point, it is good to understand that generally speaking, foreign capital tends to flock toward higher interest rates, which in turn causes exchange rates to rise.
Forex traders try to stay as informed of polictical news and events as possible. While this is a drastic example of the impact of politics can have on currencies.
Given the scale of the forex market, it is quite common for investors to use charts and the various tools of technical analysis as the basis of making buy and sell decisions. More specifically, given the liquidity of the market and broad number of fundamental factors that influence prices, it is warranted to assume that all salient data is already priced in to exchange rates.
For more on this topic, see: Understanding the factors that move currencies is an important first step to becoming a successful forex trader. If you choose to follow a fundamental strategy, be sure to keep a calendar that highlights important dates so you know when these reports are released. Your broker may also provide real-time access to such information. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. What Factors Move a Currency? By Casey Murphy Investopedia Share. Economic Releases First, an over simplified concept that is important to understand is that capital flows into economies that are considered safe, stable and growing.
Here are some of the most common economic releases that investors pay attention to: Gross Domestic Product GDP GDP is a report that outlines the monetary value of all the finished goods and services produced within a country during a specific time period.
Non-farm payrolls Non-farm payroll figures refer to any job in the economy with the exception of farm work and other situations such as those employed within the military and intelligence agencies.
Differences in Interest Rates Varying interest rates among lenders in different nations is one of the primary drivers of currency prices. How Global Events Affect The Forex Market Technical Analysis Given the scale of the forex market, it is quite common for investors to use charts and the various tools of technical analysis as the basis of making buy and sell decisions. Technical Analysis Works In Forex Markets Understanding the factors that move currencies is an important first step to becoming a successful forex trader.
Knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex. The pound is one of the world's most popular traded currencies, and is heavily impacted by these factors. We look at how you can predict a currency movement by studying the stock market.
The forex market has a lot of unique attributes that may come as a surprise for new traders. An in depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns. Before entering this market, you should define what you need from your broker and from your strategy. Every currency has specific features that affect its underlying value and price movements in the forex market.
In an increasingly globalized economy, the significance of the foreign exchange marketplace cannot be underestimated. Warren Buffett attended multiple prestigious schools on his path to success, but he places much more significance on real-world Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Corporations sometimes issue shares with no par value because it helps them avoid a liability should the stock price take Get Free Newsletters Newsletters.More...