The forex market relies on various macroeconomic factors to thrive. Currency exchange is a global affair that brings together all the economies in a single market.
While the value of a particular currency seems to be constant within the borders of a particular country, it keeps changing in the forex market. The factors that lead to this fluctuation are determined locally depending on how the local economy performs. Most of the factors that determine the value of the currency can be brought about by policy among other things. There are several economic factors that affect the forex trading. You can click here for more information about the forex trading business as a whole. The following are the key economic factors that influence the forex market.
Gross domestic product
The GDP is the measure of the economic activity in a country over a period of time. GDP is usually measured annually and it gives an indication of the levels of productivity in a given economy. The GDP affects the forex market because it captures the levels of spending in the market. If there are high levels of spending in the business, it means that the forex market will experience an increased level of activity too. Participants of the forex market therefore usually check on the market performance in order to gauge the expected level of business in the forex market.
Secondly, international trade is a major determinant of how active the forex market is. Where there is a huge level of export and import activities, the demand for currency exchange services is high. International trade determines the balance of exchange in a particular country. The balance of exchange, in turn, determines the strength of the currency.
Depending on how successful a country is in managing its balance of trade, the local forex market can either be weak or strong. Countries that have a favorable balance of trade often have strong currencies and a vibrant forex market.
Interest rates and inflation
Interest rates have an effect on lending and foreign investment. High interest rates usually lead to increased levels of foreign investment. High interest rates nevertheless discourage borrowing when unchecked. When foreign investment increases due to a change in interest rates, the currency exchange levels also go high. Inflation, on the other hand, is the overall price of commodities. When a currency becomes stronger due to increased investment, the price of goods goes down. The reverse can also happen however and lead to the depreciation of the currency and a lower demand at the forex market.
Capital market reports have a great significance on the forex market. Many economic reports are given several times in a year. These reports give details of the economic performance of a particular country. The perception created by these reports can either build or harm the reputation of a particular market. Market reports give a highlight of:
- Expenditure in an economy
- Government spending
- Interest rates and other macroeconomic insights
Economies are usually led by commodities or securities. If reports indicate that there is a progressive well-off of securities, then the perception of the economy will be negative and this will affect the forex market. For economies which rely on commodities like oil, negative economic data would negatively affect the forex market.
Political and Geopolitical Events
Political occurrences affect the economy in a major way. Most economic policies are heavily dependent on the political decisions of any economy. Issues like monetary policy changes, nationalization of assets, trade policy and restrictions among other issues are all determined at the political level. Politics thus holds the key to the performance of the forex market. An economy that has favorable policies has the ability to make major economic milestones. As the economy grows, so does the local currency. Bad politics and instability can likewise lead to poorly performing economies and a dormant forex market.
The above are the key factors that influence the forex market. The macroeconomic activity and decisions of any economy have a great significance on the strength that the economy has. The strength of the economy is, in turn, reflected on things like bearable inflation and a strong currency. These factors are the recipe for a strong forex market. The same factors can also contribute to a weak market when they are not permitting.