Ever wondered what moves the forex market? What factors affect the forex market? What forex market moves the most? What is the best time to trade on forex?
Then, you are in the right place.
Here, you will understand a critical mistake you could be making that stops you from winning forex deals. The main problem usually lies in trading currency pairs without having adequate data about the root of the price changes.
For instance, several demand and supply factors control the market. However, the key determinant is the government’s monetary policy.
The next step? Find out the kernel of market participants, as explained below.
What Moves the Forex Market? The Overall Trick to Understanding Price Change
As Yvan Byeajee says, “There is a huge amount of freedom that is derived from not fighting the market,” it helps to understand the forces behind price fluctuations and tune your trading according to the flow.
It would be best to understand how political, social, and economic factors influence spreads. A spread is a difference between the selling and buying price of a currency pair. Here is how the three factors affect price fluctuations.
Political environments influence global trade within a country. For instance, perceived political stability after an election causes a chunk of forex traders to invest in a particular currency.
Socially, the traders will perceive a rise in the value of the base currency, promising a higher return during selling.
Of the three determinants, economic factors play a giant role. The central bank can use monetary policies to regulate its effect on forex. It happens in the following ways.
What Factors Affect the Forex Market?
The main economic factors that affect the forex market are:
- Interest rates
- Economic stability
- Trade-Weighted Index
- World events
- Government debt
Interest rates play a massive role in controlling money flow in the economy. The government, through the central bank, can use interest rates to influence money that investors, banks, and citizens access through two main policies.
The first regulatory policy is Contractionary. In contractionary policy, the central bank slows down economic growth by raising interest rates. Consequently, the spending rates in a country drop.
Secondly, the central bank may apply expansionary policy to uplift economic growth. They do that by lowering the interest rates. The commercial banks can then lend more money to citizens.
You are probably wondering why the government would slow down economic growth. It is simple.
The forex market relies heavily on stability. Abrupt falls or rises in a currency’s value would make forex traders lose trust in the currency’s viability and economic stability.
Most governments check inflation changes to under 2% to maintain global faith in its currency. The expected rise in a country’s currency value attracts a chunk of traders to base the currency.
A country with a high money reserve is likely to maintain investors’ lucrative perception of the currency.
On the other hand, enormous government debt is likely to cause economic instability. The result is the fall of the trade-weighted index.
Then, a currency’s value may be lower than a pool of other currencies. This leads to various traders selling more of the currency if it is the base currency.
Global events, such as the Pearl Harbor attack in 1941, had a massive impact on the economic stability of countries like the United States. Despite leading to the fall in the value of most currencies, the war caused the US Dollar’s value to propel.
What Forex Market Moves the Most?
It would help to understand the most volatile currency pairs to enable you to enter or exit the forex market at the right time and make voluminous wins. These are AUD/USD, CAD/JPY, AUD/GBP, NZD/JPY, and AUD/JPY.
What Is the Best Time to Trade on Forex?
The best forex trading time depends on your strategy, currency pair, and time zone. For example, the best time to conduct day trading in London is between 8 AM and noon.
Demand and supply forces play a huge role in moving the forex market. That is why government attempts to control the inflation rate to maintain a positive perception of forex investors towards the country’s currency.