Have you been in doubt about the impact of economic theories in the forex market? We are here to clear those doubts. The truth is, there are forex market economic factors that affect the overall behavior of the market. Just like financial news affect the stock market, information concerning a certain economy has a high tendency of directly impacting on the movement of their currency. Below, we will be discussing the various economic factors that affect the forex market. Stick with us.
In the United States, non-farm payrolls refer to the data concerning the number of employed individuals within the US economy. This data is released by the Bureau of Labor Statistics on the first Friday of every month. If there is a strong decrease in the data, it implies that the economy is contracting; however, if there is a strong increase, the economy is considered prosperous.
This is one of the major forex market economic factors. Any change in the inflation rate affects currency exchange rates. Assuming a country has a low inflation rate, the value of its currency will increase. If the inflation rate is low, the prices of goods and services will only increase at a slow pace. When a country has a fast-increasing inflation rate, the currency will continuously depreciate, and higher interest rates normally accompany this. On the other hand, a country with a low-interest rate will have a more stable currency.
Political stability is among the commonest forex market economic factors. The political performance of a country can affect its currency positively or negatively. Foreign investors consider it more appealing to invest in a country with a lesser tendency of political disorders. This draws more foreign capital to that particular country, which in turn increases the value of the domestic currency. If a country has an excellent trade and finance policy, its currency will certainly be stable. However, a country on the verge of political instability will likely witness a reduction in its exchange rates.
Recession is another widely known forex market economic factor. Any country that is experiencing recession witnesses a declining interest rate, which also reduces its chances of acquiring foreign capital. This, in turn, weakens its currency in the exchange market.
Terms of Trade
It is the ratio of export prices to import prices. Again, it is one of the major forex market economic factors. A country is said to have improved terms of trade if the export prices grow higher than the import prices. This translates to higher revenue for the country, thereby creating a huge demand for the country’s currency. With this, the currency value also increases. If a country has poor terms of trade, the reverse will be the case.
We believe that this piece has been able to reveal the major forex market economic factors to you. If you are a forex trader, being conversant with these terms is important. To avoid pitfalls in your trading career, carry out trades when these factors are favorable.