Big moves in currencies are often driven by big stories in the financial markets and the direction of interest rates. For example, in the US, Fed Chair Janet Yellen is stepping down from her post in 2018 and the chair has appointed a new Fed, Jerome Powell. Changes in economic policies and ideologies between the outgoing and incoming Presidents will have an impact on the foreign exchange market.
the great stories
When it comes to the financial markets, staying on top of the big stories is critical to your success as a trader. For example, when Great Britain voted to leave the European Union (EU), most financial markets around the world experienced huge downward swings in reaction to the vote. While this was an extraordinary event, we cannot rule out events that can have a profound impact on a coin’s value. These events include, but are not limited to, the following:
Potential or actual changes in government
economic crisis
Major announcements from finance ministers and central bankers
Central bank intervention
wars and terrorism
Natural disasters
Economic policies of different countries.
In recent years, we have seen many events that have drastically affected the forex markets. The euro was drastically devalued with England’s vote to leave the EU. The world economy was hit when the Greek government was on the verge of bankruptcy. The Venezuelan bolívar has been rendered almost useless by its economic policies. These are just a few examples and there are many more.
A smart Forex trader follows the news as it can help predict the market. The gains from following major news events can be large and the losses minimized.
Interest rates
Interest rates are the most important long-term driver for currencies. Globalization has made it easier for investors to transfer money from one country to another in search of higher returns. For example, an investor in the US can get an interest rate of less than 1%, while in Argentina they would get an interest rate of 20%. Where would you rather have your money stored? When a central bank changes its key interest rate, it affects the borrowing costs of individuals, corporations, and even the government. For businesses, higher rates mean higher borrowing costs, making equity investments less attractive. For people, it means higher payments on credit cards, cars and mortgages, which are meant to slow growth. Low interest rates, on the other hand, are generally aimed at fueling economic growth.
In the long run, high rates tend to slow economic growth. Interestingly, in the short term, higher interest rates tend to be bullish for the currency. When investors move their funds to countries with the highest interest rate, the value of that currency increases. The price action after the decisions shows how changes in monetary policy can trigger big moves that can last for days and even weeks at a time.
This article was provided by Forex Traders Blog (FTB). The FTB aims to keep Forex investors informed about technical analysis strategies and major news that may affect the foreign exchange markets. Access to the blog is free.