You can never know for sure how a particular currency pair will do in the Forex market. At the end of the day, all you can do to make the best of your trades is make an intelligent guess. However, some guesses are more intelligent than others. It is important that you do your best when it comes to making good predictions in order to increase your chances of having successful trades.
The way to do this is to understand the different factors that affect the value of a currency. By understanding these factors, you can reasonably predict how well these currencies do by detecting important events that may affect them.
Forex Trading Factors
This is one of the most basic determinants for how well a currency does. The political events and atmosphere in any given part of the world affects how the currency of that particular country or the currencies of that region perform. This is because it affects the decision-making of those who may choose to invest in those currencies.
Countries that have an unstable political climate tend to have a devaluing domestic currency, as foreign investors tend to keep their distance in order to avoid a loss.
It is also crucial to look at major events that happen in a country or region, as these may affect the performance of the currency even if they do not necessarily mean that the government is unstable. For instance, the British pound significantly decreased in value during the height of Brexit, as it made investors weary of investing.
There are two important rates that you must look at in order to properly assess how a country’s currency will perform: inflation and interest rates.
Inflation rates refer to how a currency gradually lose value in terms of goods and services it can purchase. The higher the inflation rate, the faster the currency depreciates. Currencies with low inflation rates are normally at a better position compared with currencies with high inflation rates in terms of Forex trading. If a country has a consistently low inflation rate, then its currency is almost surely appreciating.
Interest rates are an indicator of foreign investment. When there is a lot of foreign investment, banks increase their interest rates to take advantage of the phenomenon. When foreign investment is low, then banks typically lower the interest rate in the hopes of enticing investors. This means that when interest rates are high, you know that foreign investors are high, meaning the currency will appreciate.
It is also important to pay attention to important economic events, as these can lead to sudden changes in the value of currencies. For instance, when the United States experienced a recession, the US dollar hit a new low. This is because foreign investors lost their confidence in America, resulting in a weakening of the country’s currency.
This can also happen the other way around. An important event, like an executive decision to drill oil, could mean an increase in foreign investment, leading to currency appreciation. In such a case, it would be a good idea to invest in that currency.
How a country manages its debts also greatly affects Forex trading. When countries default on their debts or incur new ones, this leads to depreciation in their currency, meaning it will not be doing considerably well in the Forex market.
On the other hand, when a country is perceived to be on top of its debts, making payments at a reasonable rate, then its currency will tend to appreciate.
When disasters like hurricanes and earthquakes hit a country or region, currencies are affected in a negative way, as consumer spending and confidence does tend to suffer. This means that these currencies tend to do worse against those pitted against them on the Forex market.
When countries are at war, damage to the country’s infrastructure usually spells disaster for the domestic currency, making it perform poorly in the Forex market. However, there are instances where war improves the economy of a country by strengthening its manufacturing base.
Whatever the case may be, it is important to understand that no one factor on its own affects the performance of a currency. Any given currency must be studies alongside all of the relevant factors.