What Affects the Currency Markets?

There are several factors you can watch when trading forex, but the rates of each country’s currency are driven mainly by the economic health of that nation. This can be related to the monetary and fiscal policies of the government, which means that a trader needs to carefully watch any changes in policies or changes in the government, such as around the time of elections. If a party is known to have financial platforms that are fiscally responsible, then it can be assumed that if that party wins an election, it will pursue safe economic growth. Of course, the contrary could be true as well, if a party with a questionable economic policy wins the elections. Whatever the case, successful traders watch the political and economic climate of a country carefully, because each one can affect the exchange rate of its currency. The following are a few more tips to help with your decision to trade any country’s correct currency at the best time.

Watching Inflation Levels

According to the inflation level of a country, it can mean that price levels are increasing while purchasing power is failing. When a country has a low inflation rate, the value of its currency could be expected to appreciate. If the inflation rate is low, the cost of services and goods go up at a slower rate. Countries that consistently have a lower inflation rate have a currency is stable and rises. However, if a country’s inflation rate is high, you can probably expect to see its currency depreciating, which often is accompanied by higher interest rates. But keep in mind that inflation can have a double meaning. Traders might see inflation as pushing the currency rates down because of less purchasing power. Or it could have an opposite effect. Rising prices could put pressure on the central bank to increase the rates, to try to bring the inflation levels back down. So with inflation rates, it’s good to keep in mind that there can be more than what meets the eye. It’s crucial to look at other economic factors as well before settling on a trade.

Monitoring Interest Rates

When the interest rate of a country fluctuates, it can make a significant difference in the value of the currency as well as its exchange rate to the dollar. When interest rates rise, it can cause the currency of that country to appreciate. Since high interest rates give higher rates to the lenders, they are more conducive to foreign capital. All of this works together to cause the exchange rates to rise. Take into account that interest rates and inflation levels work together when setting currency values.

The bottom line here is to monitor what’s going on in a country before trading its currency. The best way to keep track is by setting dates into a calendar marking upcoming economic releases. Since the GDP is the baseline of any nation’s economy, the reports offer you priceless information.  Take advantage of them and succeed in your trading!