After going through this tutorial, you will be able to understand and identify the main factors that affect Forex Market and be smart in your future trading decisions.

  •  Identifying possible affecting factors to Forex
factors affecting forex market

Forex or FX market is by far the largest market in the world. In Forex market, various kinds of traders trade currencies 24/5. In Forex market, each trade involves two currencies. Simply, every Forex trade is a buy-sell action of two currencies. In other words, we know it is an exchange of two currencies. When currencies involved in the trade, sovereignty issues come in to place. As the sovereignty issue, many other Forex market factors are there evolving the Forex trade.  

Every currency has its own value. This value depends on many factors. To make this statement simpler, let's think about countries imports and exports. When a country’s imports exceed the limit of exports, they have to pay more than their income. If exports exceed imports, that government gets an income. In the first situation, the relevant countries economy goes down. In other words, they have to spend their government reserves to fulfil their imports. In the second situation, we can expand the government reserves by income. So in the above scenarios, the relevant country’s currency value goes up and down. 

Other than the imports and export difference, many other factors are there affecting the Forex market. Let’s take down these factors and discuss one by one. 

Remember! Every currency we trade has a direct influence by these factors.

Here are the factors affecting currency value. Namely,

  1. Inflation
  2. Interest Rates
  3. Recession
  4. Government Debt
  5. Speculation
  6. Political Instability /Stability
  7. Natural Disasters

Inflation

If inflation becomes higher and higher in rate, that means you have to spend more money on things to buy. Say you are interested in buying an Apple iPhone 11. It costs nearly $850 in the USA. When we come to Japan, It costs 90,744.30 JPY. With time, while the USA price stays at $850, price in Japan rices up to 100,000 JPY. If we look at the scenario closure, we would notice that the value of the INR reduced. The value reduction of Japanese Yen causes the iPhone price to go up. Therefore the value of JPY compared to USD reduces with time. If we take the exchange rate of two currencies, the rate USD/JPY increased with time. 

This is how inflation affects the prices of goods and services. In other words, the devaluation of a country’s price causes inflation.

Interest rates

If the government interest rates go up, more people tend to invest more. Not only citizens but also every organization invest personal reserves for higher profit margins. Because then they can get a higher return on their investment. This creates a demand for the relevant currency and the currency value goes up.

When interest rates reduced by the government, it automatically motivates people to apply for more loans and mortgages. Naturally, a large portion of investments withdraw by the investors, This reduces the demand for the currency and currency value goes down. 

When the currency value goes up, currency exchange rate goes up and vice versa.

Recession

When the recession affects a country, everything related to the economy goes down. It is an economic turmoil. GDP of the country goes down and unemployment rises. Import, export difference automatically reach a minus value. This also affects inflation making it higher and higher in value.

Say it USA, its domestic production goes down, the unemployment rate increases and inflation begins to dominate. That devalues the USD.

Political instability/stability

Forex market factors political

Political situation of any country directly interconnects with its economy. The stable political structure makes an economy to rise. For instance, if the government is taking steps to develop the infrastructure and living standards, it makes the economy grow. Unfortunately, the unstable political situation destroys the economy. Without proper guidance and laws, any economy goes down over time. As the economy grows, the value of its currency inevitably goes up. To bring up another, a change of a government may lead to a change in their fiscal policy. If the new fiscal supports currency value to go up, it makes exchange rates higher in value.

Natural disasters

Forex market factors - disaster

Natural disasters like floods, earthquakes, tornados,...etc put a country into a desperate situation making it hard for the economy. It slows down production in every section making factories damaged and displaced. People lose their living and the whole country gets stuck. In a situation like this, that country cannot continue its exports. The value of its currency automatically goes down. It makes its exchange rates to go down.

Above explained factors directly affect a country’s currency value. As you know, fluctuation in currency value changes the exchange rate every time. These fluctuations in the exchange rates affect the Forex market as it is the market for exchanging currencies.

Government debt

government debt forex

If a government undergoes a large number of debts, the growth rate of the economy automatically decreases. Any government has their own income calculated by import and export difference. When the debts are larger than the income, value of the currency goes down. It makes the exchange rates to go down.

Speculation

If a country’s currency gains a hope of increasing its value over time(a short period), investors around the world buy that currency. Naturally, a demand creates and increases throughout the world. This higher demand affects the currency in increasing its value. Boost in the relevant currency value increases the exchange rate.

Terms of Trade (TOT)

Terms of Trade formula

It is the ratio at which any country can export its production/goods for imported goods. If a country’s exports are greater than imports, that country is in a healthy economic condition as it brings higher revenue. That means the country’s currency gets a high demand. And as a result, it creates an increase in the currency value.

Above explained factors directly affect a country’s currency value. As you know, fluctuation in currency value changes the exchange rate every time. These fluctuations in the exchange rates affect the Forex market as it is the market for exchanging currencies.