Table of contents:
- 1 1. Political decisions or elections
- 2 2. Announcements
- 3 3. Publications
- 4 4. International crises
- 5 5. Events in the economy
- 6 6. Natural disasters
- 7 7. Consumer climate and trade index
- 8 8. Raw material/oil prices
- 9 9. Capital movements
- 10 10. Purchasing Power Parity
- 11 11. Monetary policy
The forex market is determined to a particularly large extent by supply and demand. The exchange rate depends largely on them. This becomes particularly drastic if, for example, investment companies, banks, or entire countries carry out sufficiently large trades at one go. Then the price can rise suddenly or fall just as abruptly.
For example, the economic calendar shows always events which can influence the foreign exchange price:
These developments can be seen on a so-called chart. It shows the price developments graphically in a line chart. Brokers urgently need such charts for their work. They can use them to read the exchange rates and make them the basis of their future forecasts. In chart analysis, financial experts try to read off trends.
In addition to the mechanisms of the market, however, exchange rates are also closely linked to events and political decisions in their countries of origin.
1. Political decisions or elections
Currently, the influence of elections can be seen very clearly in the US dollar. Since the election of Donald Trump in November, the dollar has lost value against the euro almost continuously. In addition, since Trump’s election as president, Mexico has had to throw hundreds of millions of dollars into the market to counter the peso’s fall, which has been fuelled by protectionist tones. Thanks to large currency reserves, this was fortunately possible from Mexico’s point of view.
The current soaring of the euro cannot be justified by the fact that there has been a change in the ECB’s interest rate policy. No, among other things, it is only due to the expectation that in the next interest rate round there will be a move away from zero interest rates.
In addition, Mario Draghi had announced an end to the economic development program and thus to the flood of money. Moreover, the waves in the EU have smoothed and the economy in Southern Europe is slowly beginning to recover. This is also creating confidence among investors again.
Nevertheless, the signs should actually be the other way around. The FED had already raised interest rates in December 2015, and while the USA wants to be independent of energy imports by 2020, Europe continues to obtain its gas primarily from Russia.
As a result of the Brexit referendum, the British pound has fallen sharply against the euro. However, a comparatively insignificant announcement of the current inflation rate also had a direct impact on the exchange rate of the British Pound. This shows how almost minor publications can have an impact on currency rates.
See the EUR/GBP chart:
4. International crises
Contrary to expectations, however, the consequences of the nuclear dispute with North Korea remained. While foreign trade and foreign investment fell sharply, the South Korean Wong was relatively unimpressed.
5. Events in the economy
If, for example, a change takes place at the top of major car manufacturers, technology, or energy groups, this can also affect the exchange rate, provided the company is of a suitable size. However, the publication of annual figures of important companies can also have a major impact. In this case, the change in price can first be seen in the key share indices.
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6. Natural disasters
Natural disasters and environmental events can also have a significant impact on the foreign exchange market. When Hurricane Irma headed for Florida, the dollar reacted immediately. Investors feared high losses from the storm, and currently USD 40 billion in costs for insurers are in the offing. But as the storm lost strength, the dollar regained its strength.
7. Consumer climate and trade index
Both economic indicators make it possible to forecast the near economic future of a country. This in turn is decisive for the strength of its currency.
8. Raw material/oil prices
Commodity prices in general and oil and gas prices in particular also play a prominent role in the foreign exchange market. Russia was hit hard by the sanctions imposed after the annexation of Crimea, but the fall of the rouble into the abyss was mainly due to low commodity prices.
This is impressively demonstrated by the fact that Russia has managed to raise three billion euros on the market. And all this only a week after the sanctions were extended. Russia’s dependence on commodity prices is apparently far greater than that of good relations with the West. But the economies of Canada and Australia are also very dependent on commodity prices.
9. Capital movements
For capital flows, the share of underlying real economy transactions has fallen to as little as 10%. The lion’s share is attributable to speculation. Consequently, the stock exchanges are also price drivers. Here, however, it is true that a weak stock market leads to rising prices, as investors flee into fixed-interest alternatives. It is therefore also worth taking a look at the most important stock markets in terms of foreign exchange trading.
10. Purchasing Power Parity
The theory of purchasing power parity states that exchange rates would adjust to inflation rates in the long run and goods and services could be purchased at the same price. If one and the same bicycle model costs 2000 US dollars in the USA and 1600 euros in France, the EUR/USD exchange rate would, according to the theory, have to adjust to 1.25 in the long run if it is not at that level. If this is not the case, there is no purchasing power parity. A common method for a simplified calculation of the value is the Big Mac index, which compares the prices of burgers in different countries of the world.
11. Monetary policy
The monetary policies of individual countries can also lead to price movements that are difficult to predict. For example, in addition to Mexico, Russia and China have recently had to throw large quantities of US securities onto the market in order to strengthen their currencies. It may be foreseeable that these steps would be necessary, but the exact timing is difficult to predict.
Conclusion of the influences of the forex prices
In conclusion, Karl Marx could be quoted as saying, “Capital is a shy deer.” The list goes on and on. The slightest tremor can throw the markets into turmoil and trigger huge capital flows. Sometimes you expect them to come, and then they don’t.
The forex market is very complex and certainly not for beginners. On the one hand, fast and high profits are beckoning, on the other hand, the tide can turn quickly and everything is lost. It is therefore advisable to study the subject in detail before you start trading in the forex market.
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