Factors That Affect The Forex Market

7 Factors That Affect The Forex MarketNowadays, more and more people invest in forex or foreign exchange, it has become the largest market today, and it is still growing. However, it is not that easy to get profit in this forex market, if you are not familiar with it, the only result you can get is losing your money.If you have decided to join this market, then you have to know that the forex market trends can be influenced by several factors, and make yourself familiar with them. This can do help you a lot when you want to decide when to sell or buy.Forex market can be affected by major factors. these factors includes.

1. Interest Rates

After all, on the surface forex traders make money by the movement of bid/ask and the spread in between. However, as a country’s interest rates increase, more money tends to flow in because investors want to capitalize on the higher rates. This increases the demand for that currency and as basic economic theory dictates; increased demand pushes up the price of money aka the exchange rate. It follows then that one of the key areas of forex focus should always be interest rate movements.

2. Commodity price

commodity prices in additionally, have a direct effect on fx rates. Countries with a large number of commodities in demand, such as oil and lately copper, will undoubtedly see their economies start to grow as a result of price increases. This will furthermore affect any countries that have a low demand for commodities, while they rely more and more on other countries for their economic functions.

3. Market Psychology

The reason that market psychology can affect the forex market is quite obvious. If people do not want to invest in a country’s economy, the current price will go down, on the contrary, the price will go up.So what can determine whether or not the traders want to invest? There are many factors which can influence the perception of traders. The long-term trends can be a factor; people may make decisions on what they have seen in a long period. And international events can be another factor.

4. Political Conditions

You can never neglect the political conditions when it comes to forex trading. If the political condition is instability, it can create negative fluctuations in the economy. In other words, if the political condition is quite stable, then the economy may improve.Political change considered to be disadvantageous to the country’s economy will likely reap adverse effects on the currency of the host country and its neighbouring currencies. War also has a destabilizing effect and naturally too, affects perceptions about a country’s currency strength in world markets.

5. Gross Domestic Product

The Gross Domestic Product or GDP is simply the market value of goods and services produced over one single year. A rising GDP is considered to be a strong indicator of stability in a nation’s production and consumption. This can lead to increased interest rates, which come about with rising inflation. Higher interest rates attract foreign investors, improving a country’s currency or exchange rate thus making room for profit in the forex market.

No doubt that the most primary things which can make changes in countries’ currencies are economic factors. For example, when the budget of a country shows a deficit, there will definitely be a reaction in the forex market, and result in the changes of the currency value.If a country’s economy is prosperous, there will be more investors who are in a positive attitude. For example, if there is a growth in GDP, or a growth in employment level, you can basically see a growth in the number of traders, as a result, the nation’s currency value will probably go up.

6. Employment Levels

Employment is another critical economic factor that currency investors look into. A high unemployment rate will usually affect the exchange rate of a currency being dealt. On the other hand, a high employment rate will have a positive effect on a currency exchange rate. Not only that but a positive employment rate may also reflect the stability of a country as well as its sound economic standing.

Employment is a measure of the productivity of a nation. When employment levels are high, a great proportion of the country’s population is engaged in productive activity which furthers fuel trade and investment. Forex investors realize a high employment figure reflects a stable economy and imposes some degree of peace of mind; that the wheels of commerce are turning and the currency is in a good position.

7. Inflation

One of the factors that investors in currencies look into is the country’s inflation rate. Determining the country’s inflation rate usually involves taking measurable data of prices for specific essential goods, the rate and amount at which people consume them, and taking a percentage of a person income accounted for the different essential commodities. This information can help provide currency traders with an idea of how the country’s economy is going and where it is possibly headed. Looking forward into the probable future will help currency investors with making timely decisions at present.

Some inflation is expected as a result of economic growth, but high levels of inflation are considered a sign of poor money management and fiscal policy. When the inflationary pressure gets to be too high, the cost of living will explode, and the cost of even necessity-type goods and services become exaggerated. Thus inflation erodes the purchasing power of a currency which makes it less attractive on the forex market. Inflation is therefore yet another area to monitor to ensure your forex focus remains on target.


These factors are just some of the various indicators that investors look into to help them decide whether to buy or sell currencies. Not one factor may be depended upon to help investors make the right decisions. It is usually a combination of these indicators and how they play to affect a country’s economy that determines one’s forex trading decisions.Generally speaking, the forex market is fluctuating and unpredictable. So make sure you have learned enough knowledge about what are good strategies if you want to do trades in this market.

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