Factors Affecting The Forex Trading

Foreign exchange trading is affected by several factors every now and then. Some factors are here:

Economic Factors

These include: (a) economic policy, broadcasted by government agencies and central banks, (b) economic conditions, normally revealed via economic reports, and other economic indicators.

•    Economic strategy consists of government fiscal policy (budget/spending practices) and financial policy (the means by which a government's central bank control over the supply and "cost" of money, which is reflected by the level of interest rates).

•    Inflation levels and trends: A currency will lose value if there is a high level of inflation in the country or if inflation levels are speculated to be rising. This is because inflation erodes buying power, thus demand, for that particular currency. However, a currency may often strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to encounter rising inflation.

•    Government budget paucities or surpluses: The market usually reacts negatively to widening government budget paucities, and positively to narrowing budget paucities. The impact is reflected in the price of a country's currency.

•    Balance of trade levels and trends: The trade flow between countries interprets the demand for goods and services, which in turn refers to demand for a country's currency to conduct trade. Surpluses and paucities in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade paucities  may have an adverse impact on a nation's currency.

•    Economic Productivity: Rising productivity in an economy should favorable influence the value of its currency. Its effects are more eminent if the increase is in the traded sector.

Political Conditions

Internal, regional, and international political situation and events can have a vast influence on currency markets. All exchange rates are susceptible to political instability and prediction about the new ruling party. Political upsurge and instability can have a negative impact on a nation's economy.

Market Psychology

Market psychology and trader idea influence the foreign exchange market in a variety of ways:

•    Flights to quality: Unsettling international events can lead to a "flight to quality," a sort of capital flight whereby investors move their assets to a perceived "safe haven." There will be a larger demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been conventional safe havens during times of political or economic uncertainty.

•    Long-term trends: Currency markets often rush to visible long-term trends. Although currencies do not have a yearly growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may create from economic or political trends.

•    "Buy the rumor, sell the fact": This market truism can apply to many currency conditions. It is the tendency for the price of a currency to reflect the impact of a particular action before it happens and when the predicted event takes place, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".

•    Economic numbers: While economic numbers can surely reflect economic strategy, some reports and numbers encounter talisman-like effect.