The forex market is one of the most volatile markets in the world, plus it is the most liquid in term of billions of dollar. You can trade currencies from Monday to Friday, and you can make a profit either a pair is bullish or bearish, because the character of this market it always offers two ways to see things.
What drives the Forex market
However, what drives currencies and what affects the forex market is a topic hardly discussed and widely polemic. Here, in ForexTraders’Guide, we can say that everything can change currencies and forex pairs.
So, let’s talk about the most important factors that affect forex trading and move coins.
Fundamental factors in Forex
Fundamental factors are topics related to economic news, relationships between countries, and central banks. It can affect the valuation of a currency in two ways, the perception that an economy is in good or bad shape, or setting conditions that can move money.
Central banks are financial institutions that control the stability, the supply, production, and distribution of money and credit in a country or region. To do that, they control the monetary policy and the regulation of the country.
They raise or reduce interest rates, print money, control the supply and demand of currency, and provide liquidity to regular banks.
The most important central banks in the world are the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Japan, Bank of Canada, Reserve Bank of Australia and Reserve Bank of New Zealand.
Differentials in interest rates
One of the most important things in Forex is the differential in interest rates as that means that a currency with a higher rate pays more money in terms of interest than others that have a lower rate. Usually, the currency with the higher interest rate associated tends to be more bullish.
Countries with lower inflation tend to have a stronger currency as its citizens have more domestic purchasing power. Also, nations with low-interest rates point to have central banks that want to raise interest rates, so speculation for a rate hike can drive the coin up.
Countries with high debt to GDP ratio are less attractive to foreign investors, so the demand for that currency is low. For instance, its price will not rise sharply.
News are the sap of traders. Forex investors follow the news to check how a country’s economy is doing and expect future developments such as rate hike or money injection, higher inflation, or more retail sales following an unemployment drop. Bad news points to depreciate currencies.
As politics are in control of countries, what they think matters. Follow them to anticipate trends and policy changes, new developments, or future events.
Technical Factors in Forex market
Technical factors that move the Forex market are usually related to money flow and chart patterns as well as statistical studies.
Supply and demand
Like any other market, offer and demand mark the price of a currency. If more people are selling than buying a coin, the price will go down, and the opposite when everybody wants to buy a currency, the price tends to go up.
It is essential as liquidity can affect the deep and violence of a move. In markets with low volume, a break could be more violent than others with many transactions involved. Also, in a Forex hour with low volume, some orders can be played due to the market necessity to solve divergences and price differentials.
Levels, support, and resistance
Psychology is everything in Forex, so levels, trends, and movements that can focus traders attentions are essential. Everything is changing in the Forex market; a resistance can become support quickly, and buying zones can be remembered. Also, rounded numbers are always levels to watch.
It is a holistic topic as it may include both fundamental and technical nuances. Currencies usually follow what people expect that is going to happen because traders make it happen. If everybody believes the dollar will rise and they start buying it, it will go up for sure. But, why? Because of dollar’s strength, or because people put it higher due to their beliefs?