• About
  • Mortgage Basics
  • $40K Challenge
  • Aunt Doris
  • Grandfather Says
  • Privacy
  • Archives

Len Penzo dot Com

The offbeat personal finance blog for responsible people.

How Economic Events Influence the Forex Market

By Tex Freitag

Currency Dice representing, yen, euro, dollar, and pound sterling from china, england, usa, and europe on white backgroundJust like commodities, currency exchange prices are also influenced by the forces of demand and supply. These forces are triggered by several aspects, which cause increase or decrease of demand or supply suddenly, thereby causing the fluctuation of currency values.

Anything that significantly influences money flow between countries or within a country can impact the currency prices. Here are several aspects that typically influence the forex market:

The economy

A country’s economy status typically determines its currency value. Developing a strong economy is the foundation of a stable currency value which is highly trusted. Factors that affect economic growth positively or negatively can cause a disturbance in currency rates. For example, currency value falls during inflationary times — thus, the purchasing power of that currency decreases.

Before making forex trade decisions many economic indicators should be considered. The following indicators are representatives of several economic aspects:

  • Gross Domestic Product (GDP). This is a quantitative measure of national economic activity. Steady GDP indicates healthy economic growth, and currency values generally rise under such conditions.
  • Purchasing power parity (PPP). This measures the currency’s proportionate power to buy goods and services. For example, if 50 currency units from Country A is equal to 5 currency units from Country B, that means goods bought for 50 units in Country A country must be equal to the same goods bought for 5 units in Country B. If the countries PPP do not match evenly, then the country with greater purchasing power will hold a higher value in Forex trade.
  • Interest rate parity. Interest rates in both countries must be comparable, so investments yield the same returns.
  • Employment Status. National productivity is determined by employment levels. High employment suggests a healthy economy; that enhances currency value.
  • Consumer spending. When spending is high, it generally means people are confident about their future investment yields and earnings. This usually results in a stable currency with high rates.

Government policies

Of course, capitalist government policies are intended to encourage favorable economic conditions. When a national economy lags, governments usually try to correct the imbalances in one of two ways:

  1. Fiscal policies. Outlines Government spending for e.g. Annual budget
  2. Monetary policies. Central bank implements Government policies that enhance or sustain the economy through various investment strategies.

You can learn more about central bank influence on the forex market by reading the daily forexnews on the Internet.

Natural disasters

Natural disasters like floods, or famine in a country negatively affect currency values. Under adverse circumstances, the money flow within that country’s boundaries gets severely restricted. People start becoming more cautious about spending, which dramatically reduces overall investment funds. Government spending gets reduced due to the huge expense in relief activities.

International trade

International trade activity reflects demand for a national currency because the exchange of money between countries influences the currency values of both nations. As a result, forex traders need to consider this aspect before making any investment decision.

Political factors

Political unrest signals uncertainty about the future, and restricts economic growth. A war or upcoming election often results in a more careful investment approach, thereby decreasing a nation’s capital flow. Needless to say, politically unstable countries are not preferential trading partners.

Photo Credit: m4d group

October 28, 2016

Comments

  1. 1

    Jay @ ITF says

    Thanks for the post Tex. Forex Markets are more interesting than ever these days. Not only are there lots of political happenings influencing currency markets, but overall the globe is so much more connected and intertwined. It’s no wonder that economic events have an influence on these markets. Thanks again for sharing your thoughts.

  2. 2

    UniversoForex says

    Today another incredible example: the Central Bank of Turkey raised its interest rate, but Lira goes down in forex due to a political event (the European Commission has decided to freeze the accession process of Turkey in the EU). Forex is great, Forex is unpredictable

The Question of the Week:

Will you be taking a summer vacation in 2022 that's more than 500 miles from home?

View Results

Loading ... Loading ...

Recent Posts

  • 6 Ways to Create a Stylish Home Office on a Budget
  • 9 Indispensable Financial Tips for Teens & Twentysomethings
  • Black Coffee: Back to the Borscht Belt
  • Buying Your First Home? Here Are Some Financial Assistance Options
  • Yes, You Can Afford It!
  • 100 Words On: Why It’s Not Poor Etiquette to Put Ketchup on a Hot Dog
  • 6 Responsible Ways to Use Your Emergency Funds
  • 5 Affordable Ways to Upgrade an Outdated Bathroom
  • The 6 Most Valuable Grocery Store Products
  • Black Coffee: Out to Lunch

Disclaimer

This site is for informational and entertainment purposes only, and the content herein should not be mistaken for professional financial advice. In fact, making investment decisions based on information published here, or any other website for that matter, is more than unwise; it is folly. This website accepts advertising in the form of monetary and other compensation; as such, topics of discussion are occasionally influenced by these advertisers. Sometimes, an article may also include affiliate links, meaning, at no additional cost to you, this blog earns a commission if you click through and make a purchase (for example, as an Amazon Associate I earn from qualifying purchases). Remember, you and you alone are responsible for the decisions you make in life, so please contact an independent financial professional for advice regarding your unique personal situation.

Sign up for the weekly Len Penzo dot Com newsletter
Len Penzo dot Com Delivered Weekly
Join more than 40,000 readers and fans who enjoy personal finance and macroeconomics with an offbeat twist!
Invalid email address
Thanks for subscribing!

Popular Now:

  1. 1. The Great Paper Towel Test: Which Brand Is Your Best Value?
  2. 2. How a Broken Washing Machine Fixed My Finances
  3. 3. Tip Inflation: We’ve Got Nobody to Blame But Ourselves
  4. 4. Lottery Fraud: Don’t Get Caught Paying “The Stupid Tax”
  5. 5. What’s the Fastest Way to Pay Down Your Mortgage Early?
  6. 6. The Marriage Conundrum: Joint or Separate Accounts?
  7. 7. Why Time Is More Valuable Than Money
  8. 8. 25 Examples of Shrinkflation That No Longer Fool Consumers
  9. 9. Historical Gold & Silver Benchmarks for Wages and Commodity Prices
  10. 10. 4 Good Reasons Why Some Quarters Are Painted Red

All-Time Most Popular:

  1. 1. 19 Things Your Suburban Millionaire Neighbor Won’t Tell You
  2. 2. Dear Friend: Here Are 41 Reasons Why I’m NOT Lending You the Money
  3. 3. Why Your Expensive Luxury Car Doesn’t Impress Smart People
  4. 4. If You Can’t Live on $40,000 Annually It’s Your Own Fault
  5. 5. 21 Reasons Why Corner Lots Are for Suckers
  6. 6. 4 Smart Reasons Why College Isn’t for Everyone
  7. 7. 18 Fast Facts About Social Security Numbers
  8. 8. My Ketchup Taste Test: Upset! Guess Which Brand Topped Heinz
  9. 9. Why I Prefer a Spreadsheet to Track Expenses and Manage My Finances
  10. 10. Here’s a Simple Trick for Getting Credit Card Interest Charges Waived

Copyright © 2022 Len Penzo dot Com · All Rights Reserved · Designed by Nuts and Bolts Media

© Len Penzo dot Com 2008–2022