Economic and Global Effect on Currency rates
While the Forex market responds well to technical analysis, many traders remain mindful of the impact of fundamental influences and literally base their trading decisions on events in the news and economic announcements. Market-moving information impacting other sectors such as the commodities might require specialized knowledge and research to interpret and apply to trading but matters of economic and political significance are readily available in any news media and are familiar to many people.
Fundamental factors, seasonal and weather trends, daily news, and other current events may have already been factored into the markets.
Interest rates
It used to be said that Alan Greenspan could move the financial markets with virtually anything that came from his mouth. Today, a meeting of the Federal Open Market Committee to make an announcement about interest rates will still have an impact on the Forex.
Higher interest rates make a currency more attractive for investment because of higher yield. Anticipation of a rate hike may create a higher demand and when the rate hike actually arrives, it might already be priced into the market. Forex traders eagerly watch for FOMC announcements that typically have a significant impact on the Forex market, even if the reaction is short-lived.
Interest rates control inflation by making it more expensive to borrow money for economic expansion. Higher than expected inflation readings can lead to expectations of interest rate hikes, and so strengthen a currency on the anticipation.
Central bank intervention may take the form of manipulating interest rates for the express purpose of controlling the value of a country’s money. For example, the Bank of Japan is known for using the country’s interest rate to deliberately manipulate the value of the Yen. As a net exporting nation, Japan’s greater interest lies in keeping the Yen low which in turn keeps its goods competitive on the global market.
GDP
As the sum total value of all goods and services produced in a year, the Gross Domestic Product is a broad measure of the strength of a nation’s economy. Because they are issued as advance and preliminary reports ahead of final figures, GDP announcements are considered a lagging indicator. Forex traders may find that GDP figures can significantly impact currency values if announced figures were not expected and deliver a surprise to the market.
Like other economic announcements, the impact of a GDP report may take the form of a sharp but short-lived move on currency values with no lasting effect even minutes after the report.
Inflation
Inflation is a primary influence on the value of currencies around the world. A rise in inflation will pressure a currency’s value downward, reducing its domestic buying power. Conversely, containment of inflation will show up as a strengthening of a currency’s buying power which will be reflected in its exchange rate. Anything that impacts the level of inflation in a country will translate into an effect on that country’s currency exchange rate. Unlike economic announcements, the impact of inflation is more likely to have a lasting effect on exchange rates and can impose significant influence to define a trend. Past performance is not indicative of future results.
Macro economic effects geopolitical events
News around the world can certainly be observed to have an effect on the Forex market, often as the news is breaking. Geopolitical events particularly can sometimes be seen to have a nearly instant effect on the Forex with sharp spikes to the pairs that include the currency of nations in the news. Forex traders should exercise caution during times of global unrest as geopolitical chaos often translates into chaos in the financial markets. An extreme initial response by the market may actually retrace after a short period of time.
The Swiss Franc is often closely watched by Forex traders through times of global discord as, like gold, it is considered a safe haven. Currency pairs containing the Swiss Franc may respond with a strengthening coming from the Franc’s position in the pair.
Macro-economic factors that have broad impact on a country’s currency have the potential to translate into lasting trends.
