The top 5 factors that affect forex trading
Deciding to invest in the foreign exchange market is the first step to becoming wealthy. However, this investment is not all roses and diamonds. Today’s exchange rate is almost certainly different from what it will be tomorrow because numerous factors affect forex trading, which I will sensitize you about.
Some of the factors that affect forex trading have a more significant effect on the exchange rate compared to others. For this reason, I have compiled the top five factors which influence the exchange rate to educate you and make you a better investor than before.
Having this information will not only increase your knowledge base but also help you to understand the things to look out for to avoid making a blunder. Below are the top five factors which influence exchange rate;
- International trade
If you have been asking yourself what affects the forex market, then you should know that the main factor is the trade between countries, which happens daily. The importance of exchange rate in international trade is because the amount of commerce that one country does with another automatically affects the local currency.
If, for instance, your country exports more items than it imports, it is said to have a trade surplus, which in turn increases the currency value. The increased value is because of the increased revenues, which means that there is a higher demand for the country’s currency.
When a country exports less than it imports, it has a trade deficit. This means that the value of its currency decreases due to decreased revenues. In turn, the exchange rate depreciates. The importance of the exchange rate in international trade, therefore, cannot be overlooked.
As an expert trader, I can also advise you to be aware of your country’s current account, which shows the balance of earnings versus trade. If the current account has a deficit, the government is spending more on imports and making less on exports, which leads to a trade deficit.
- Natural disasters or phenomena
What are the five major factors that influence foreign exchange rates? Natural disasters or phenomena that affect the world have a great impact on the value of different currencies. In 2020, for example, you and I have already witnessed the effects of the COVOD-19 outbreak.
Disasters such as earthquakes, tsunamis, novel diseases, floods, and the like instantly affect the currency of any country. How global events can affect the foreign exchange market? When these events occur, the citizens and residents of the affected region, spend less money on investments to deal with the prevailing circumstances. Some of them are rendered unable to continue investing because of the loss of jobs. The loss of loved ones also shifts attention from investing to grieving.
The affected government also redirects its funds to salvaging the country instead of conducting international trade. In such moments, all political leaders unite on a common mission to rescue their people. They use a lot of money to mitigate the impact of the catastrophe. The central bank shifts its attention from making significant monetary exchanges to provide the basic amenities for its citizens to rebuild their lives.
- Political instability and government policies
Political instability and government policies impact of exchange rate fluctuations in various ways. Every year, the government comes up with a well-deliberated annual budget that dictates the amount of money that will be spent on different industries. As a result, the country’s currency is affected.
One of the other top factors that affect the value of money is the central bank of a country, which invests and moves hefty sums of money around. Each decision made by the central bank has the power to change the value of the country’s currency.
On the other hand, the political leadership of a country can significantly alter the value of a specific currency. Some leaders from certain countries are believed to be one of the causes of currency depreciation, while others are more beneficial to the forex market. As an expert in Forex trading, I can say with certainty that most brokers closely monitor national elections to predict what will happen to a particular country economically.
How does news affect the Forex market? A good forex trader knows the importance of monitoring news, especially political news and any changes in economic policies. This is because even small changes in rules can have a significant impact on markets. If civil war erupts in a country, for instance, its economy is affected within minutes, which could potentially make you lose your investment if you are not careful.
- Economic factors
The economic status of a country influences the value of its currency, and it can be one of the causes of currency appreciation or otherwise. All expert traders will tell you that you should study your country’s debt ratio, employment rate, purchasing power, gross domestic product, and even the interest rates. When you fail to do this research, I can assure you that you risk losing your investment.
How does Forex affect economy? It primarily influences capital flows. You should not invest in countries with a deteriorating currency. If you notice some dwindling in the value of your money, you should liquidate your stocks and bonds to avoid making losses.
- Inflation and interest rates
The currency exchange rates are affected by the inflation rates in any country. Under normal circumstances, countries with lower inflation rates witness an increase in the value of their currencies and vice versa. Countries with higher inflation rates also have higher interest rates.
The fluctuation of interest rate also affects the value of your country’s money. When the interest rate is high, the value of the currency increases because the lenders have a higher borrowing cost. They, therefore, attract more foreign capital that ultimately leads to a higher exchange rate.
There are numerous factors that affect forex trading. If you are a serious investor like I am, it is essential to know how each of these factors will affect your financial status. This will help you determine the optimal time for conducting international money transfers and shield you from making losses in your trade.