Being the biggest financial market in the world, forex trading has helped many individuals across the world to earn a living. It offers an investment opportunity to any interested individual so long as he/she possesses the trading skills required. Among the most important skills, traders should have is the ability to predict certain factors that affect the complex forex marketplace. Understanding such factors will enable you to make informed decisions that are more profitable. You can just trade without paying attention to these factors. You’d end up losing the amount you invested.
Having that in mind, allow me to take you through a list of some of the factors that affect the forex marketplace.
1. The Political Landscape
The number one factor that affects forex trading is the political conditions of a given country. If a country has wrangles every other time, then it means the economy will not grow. Harsh political conditions will deter away from the potential investors who would have invested in such countries. The country will lag behind in terms of development and when the economy is not doing well, the country’s currency value will go down. The strength of the economy is what determines how valuable the currency will be. If the economy is stable, the currency value will shoot high. Contrary, if the economy is not doing well, the currency will also not compare well with others.
- Inflation Rate
When there is a high inflation rate in a country, the currency value is affected negatively. In such situations, the currency value tends to drop below the normal values. For example, assume the inflation rate in country A is higher than the inflation rate in country B., In this case, the currency value of country B will be higher than the currency value of country A. The lower the inflation rates of a country relative to the other, the higher the currency value. Forex investors will seek to purchase the currency of a country with lower inflation rates.
3. Government Debt
Yet another factor that affects forex trading is the government debt of a given country. When the government of certain country borrows too much, the government debt increases. The increase in government debt scares away individuals who would bring foreign investment in such countries. For one, nobody would want to give another debt to a country that is already struggling to pay the current debt. When this happens, the rate of foreign exchange goes down and you find that nobody wants to invest in the currency of such nations.
4. Terms of Trade
How the export prices compare to the import prices is what is referred to as the terms of trade. A country which exports more than it imports has better terms of trade and its currently has more demand. When the current demand is high, more individuals will be prompted to invest in it. The currency, in this case, is strong than that of another country where terms of trade are low. An investor will venture into the currency of a country that has more exports than imports. However you need to test your strategies by using forex testing tool like Forex Tester 4 which you can read on https://mytradingtools.com/forex-tester/.
5. Unemployment Data
You may have noted that all countries produce reports regarding employment rates regularly. This report can be used to study the economy of a given country. If the unemployment rate is high, then it shows that the economy is not moving in the desired direction. The high unemployment rate can be a good sign of a stagnant economy. In such a country, you can predict that the currency value will depreciate and thus affecting it’s forex exchange rates.
6. Economic planning
If a country puts measures in place to boost its economy by creating an enabling environment for investors, it stands better chances of attracting foreign entrepreneurs. The government may decide to offer incentives that would attract investors from all over. If investors flock in the country, they will increase the currency demand and hence the currency rates may increase.
After going through the above piece of article, you are now conversant with some of the many factors that affect forex trading. Paying attention to these details is very critical for investors looking to be profitable. Always open your eyes wide to see how these factors may affect the trade. ese factors may affect the trade.