Many factors affect the Forex Market, but if we need to focus on the main ones, we will certainly talk about the economic tripod, an economic policy guideline for countries that follows 3 aspects, inflation, interest, and the exchange rate.
Do you want to know more about other financial markets? Read also Which Financial Market Is Right For You.
Economic indicators and their impact on currencies
Inflation is an indicator of how much our money can buy and how quickly that capacity is lost over time. Currently, countries like Venezuela and Syria face huge annual taxes on inflation. This means that your currency cannot be trusted and quickly depreciates against strong currencies like US dollars or assets like gold.
The economy is an inflationary process by nature, so small rates of inflation are natural in any country. Negative inflation, taxes also represent a problem indicator, because it means that economic activity is weak and factors of production are underemployed.
The second very important part of this tripod is interest rates, in other words, how much some government or society can pay to acquire money or induce capital inflow.
Since it is unlikely that anyone can control inflation in the real economy, most central economic regulators try and take care of their economic procedures by making some changes in interest rates on their government bonds.
In an open market economy, there is communication with agents every time the government increases or decreases its interest rates on this asset. Stronger economies have lower interest rates and longer periods to pay, but developing economies need to offer higher rates to attract the same (or even less) amount of capital.
Finally, our tripod is complete after analyzing exchange rates. Represents the amount of one currency needed to buy another.
The US dollar is usually a strong reference, like the euro. More recently, we have experimented with the exchange rates of unregulated currencies, such as cryptographic currencies ( Bitcoin, Ethereum etc. ).
In short, it is money that makes our daily lives easier, but in the end, it is just another product with special features. Therefore, it can be traded, accumulated, borrowed and so on. On an international scale, this creates a world market for currencies.
Other Factors To Consider
If we are interested in other factors that may influence foreigners, we can consider a group of real factors, such as Production, Employment, and Gross Domestic Product (GDP).
These elements represent how strong the economy is and its ability to generate value and wealth. While economic activity is slow, it sends bad signals to the financial market, contaminates its investors, and interferes with the mood of brokerages.
Going to the other economic sphere, in the pure financial economy, there are factors including speculation, worldwide trade associations, and government debts. These are important factors to be recognized when committing to Forex.
These points have strong relationships with expectations and information flow. Its impacts can be felt very quickly and very deeply, especially in our current society, with so many channels of communication.
The market climate can easily change with a tweet from an important president or a leak of information in the media. It is very important to know that high risk and high return investments are a multifactorial business.
Human cognitive ability is limited to deal with this complexity, so technology has come to help and improve our ability to act correctly. If you want to trade forex, start with trusted forex brokers. They are highly trained to analyze economic factors that impact the forex market.