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How economic growth affects the forex market
Written by: PaxForex analytics dept - Sunday, 12 May 2013 0 comments
The fact that foreign exchange trading has become such a globalized activity means that macroeconomic events play an even greater role in forex than ever before. With buyers and sellers from all corners of the globe participating in trillions of dollars of trades each and every day the forex market is a true global marketplace. As forex traders we should always be aware of economic events and trends which have big influence on the forex market.
The state of a country’s economy determines its currency value. A growing economy is generally the foundation for a stable currency that is valued highly in comparison with others. Any factors which impact the growth of the economy, either positively or negatively, also affect currency prices. For example, during inflation currency values typically fall. Inflation reduces the purchasing power of money so that less can be bought for each unit of money.
Economic reports are the backbone of a forex trader's playbook. Maintaining an economic report calendar is crucial to staying current in this ultra-fast paced marketplace. GDP may be the most obvious economic report as it is the baseline of a country's economic performance and strength. GDP
measures the total output of goods and services produced within an economy. However, GDP is a lagging indicator meaning that it reports on events and trends that have already occurred.
To meet the needs of a growing population an economy must expand. However, if growth occurs too rapidly price increases will outpace wage advances so that even if workers earn more on average their actual buying power decreases. With higher growth comes higher inflation and in this situation central banks typically raise interest rates to increase the cost of borrowing in an attempt to slow spending within the economy. A change in interest rates may signal a change in currency rates.
Forex traders should always be aware of the fact that the forex market is ultimately driven by economic factors that in turn are indicators of a country's economic strength. The economic outlook for a country is the most important determinant of its currency's value so knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex.