publish2017-10-09 7:27 pm

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Economic Factors That Affect the Forex Market

economics factors , forexThe forex market is reactionary; it reflects immediately any change or alteration in the region economy. There are seral economic factors that affect the forex market, any factor that could affect the country economy will influence the exchange rate. Professionals Forex traders are always watching any economic news, or press release, which can offer them a forecast of the next country financial decision. A state is similar to an enormous corporation, in which its shares’ prices are represented by its currency exchange rate and its bonds prices. Consequently, investors need to take into consideration the domestic and its principal trader partner’s economic indicators in his fundamental analyses to anticipate the exchange rate variations. The article describes some of the most important economic factors that affect the forex market.

Devaluation

Devaluation is the government or central bank increase in the national currency quote, making it cheaper to buy for foreign investors. This reduction in the official value or devaluation is without a doubt one of the economic factors that affect the forex market directly. Forex traders, who are vigilant of the economy situation and the fiscal policy for the year, expect the devaluation of any currency with certain certitude about it. However, from time to time a massive devaluation without any warning sign can be occurred, causing considerable financial lost for currency holders. Since it has a direct and immediate influence on the exchange rate, Devaluation is the most important economic factor that affects the forex market.

Inflation

Inflation is the price increase of some basic goods over time, or what percentage more a person needs to pay for the same product from year to year and in some terrible distress economy such as third world’s economies from moths to months. The inflation per se reduces the currency value, making it one of the economic factors that affect the forex market. Most inhabitants of the higher inflation country and investors try to protect their saving buying a stronger foreign currency such as USD, or GBP, or EUR.  The increase in the offering of the national currency, lower its quote creating a vicious circle, in which the lowest its price is, the more the investors try to sell it to proctet from a further price fail. An uncontrolled inflation usually crashes the national forex market, decreasing the national currency value at a faster rate than the national inflation.

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GDP or Gross Domestic Product

The GDP is the total USD  value of goods and services produced by a country over a period. It is similar to the profits report of a big corporation for a fiscal quarter or a year. The GDP summarizes the overall country economic situation for this reason; it is one of the economic factors that affect the forex market. When the GDP raises, the government has more money to reinvest in the country economic making it stronger and increasing the country’s bonds price. The higher the GDP, the more stable its economic become, attracting more investors who want a safe place for their investment, It can make decrease the country Forex exchange rate because the demand for it increases causing it gain value and become stronger in the forex market. The bigger the GDP for a country the less likely its currency loss value for that period.

Interest Rate

The interest rate is the amount of money the investors, or general people will have to pay for their loans or credit, or the dividends their saving will receive for the period. Any variation in the interest rate is considered one of the economic factors that affect the forex market. The Central Bank is who establish the different interest rates for the year. When the government wants to attract more investors it usually, increases the interest rate for saving to make it more appealing to them. This move increases the country currency demands from those who are interested in put their saving to get the higher dividends making it gain value. On the other hand, when the loan interest rate or the credit interest rate is low, it makes money cheaper. Many investors get loans, and then they exchange it for a more stable currency to get the benefits of the future forex market. It usually increases the demand for foreign currencies or increases the national currency offer making it lose value. Interest rates have been considered as one of the main economic factors that affect the forex market for most scholars and traders.

Speculation

Financial rumors can be created to modify the country’s forex market. Additionally, large capital holders and investors can generate speculations to influence the forex market at their convenience. Speculation is one of the economic factors that affect the forex market. The speculation can be seen in any forex market, most of the time the Central Banks are vigilant and take measures to reduce it or limit its effect by pouring more money or Forex in the market to decrease the buying or selling pressure of the moment. However, the Central Bank can only act in some limited way without affecting the forex market. Speculation can increase or decrease the national currency at their intended convenience. Speculation is just started by rumor, which leads traders to oversell or overbuy their assets. Consequently, the exchange rate raises or fails accordingly to the previous state. It makes more traders follow the trend worsening the market conditions, until the market auto-regulates and it makes the correction needed to reestablish the proper price without the market distortion.  Speculation is one of the economic factors that affect the forex market faster and more severally. The Central Banks are always watching for any speculation sign and try to apply corrective masures, but the market pressure can be overwhelming leading the exchange rate on the speculation direction. In any open market, the market is the king, and it will auto regulate.

Economic factors that affect the forex market are very diverse and can be easily predicted when proper attention is given to the country economic performance and its macroeconomic indexes. The Forex market is reactionary to any change in the country’s economic policies. The exchange rate encompasses all the economic factors that affect the forex market. The economic factors have a strong correlation, which produces that any variation of one of them is followed by a variation on the other. Forex traders need to keep informed to do the fundamental analysis for Forex trading. The economic factors that affect the forex market do it in a precise manner. Therefore, it can be anticipated with great certitude.

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