Forex markets aren’t like traditional financial markets. With traditional markets, the market is made up of hundreds, sometimes thousands, of private companies. These companies’ profits are, ultimately, what drives the pricing of the stock of each company and, in turn, the overall price of the market, collectively. But, in the forex market, the market is largely driven by traders, political and economic activities, and by central banking. It’s also driven by:
Capital markets refer to banks, and other financial institutions, that create liquidity in the marketplace. Bond markets are also critical in forex, as bonds are debt instruments. Both fixed income securities and currency rely heavily on interest rates. A small movement in Treasuries could signal a rally or market correction on the horizon.
International trade is important because it’s one measure of how economically secure a country is. When choosing forex brokers, make sure that your broker has software that gives you easy access to data about your currency’s macroeconomics, especially when it comes to news reports and key data about trade deficits and surpluses of a country.
Countries with large trade deficits are net buyers or importers of goods. This isn’t, in and of itself, a bad thing, but it can be if it’s not balanced by production and exportation over the long-term.
If the UK, for example, were importing more of its goods than it was exporting, it’s a sign that the company has no real competitive advantage in the world market. In other words, its domestic production lacks demand, and so its currency – its measure of wealth – isn’t supported by what its producing. Its currency value may fall, negatively affecting those who trade EUR pairs in the forex market.
As with most markets, politics can make a huge difference in how a currency pair moves. Political stability is important, especially for smaller countries, but regulatory agencies can quash a market rally if a sector is particularly vulnerable to bureaucracy.
For example, the biotech industry relies on a free market in healthcare, medicine, science, and research. If any of these industries are hampered by regulation, or if the FDA or any other worldwide regulatory organisation imposes strict controls over an industry’s trade practices, it could negatively affect the currency of that country, especially if that country is heavily dependent on a particular industry.
Reliance on an industry for economic growth isn’t always a fixed thing either. During the tech boom in the 1990s, America was particularly vulnerable to the fluctuations in the production of fibre optics and technology companies like Lucent and Nortel dominated the marketplace.
Today, few people can remember what these companies did or that they even existed.
Economic reports, especially manufacturing reports, are a major driver in the forex markets. Why manufacturing? Because it’s the backbone of almost every modern economy. It’s how goods and services are made, it’s indicative of whether consumers are out there buying or holding onto their wallets, and so it is often an indicator of how the economy is doing.
Samuel Watkins is always keeping his eye on what factors influence Forex trading. When he finds something new or pressing, he likes to share it by writing about it online. You can find his posts on many blogs and websites today.