What makes Forex markets tick? Factors affecting Forex

If you’ve ever wondered what drives the ups and downs in forex trading, you’re in the right place. The forex market isn’t random—it’s influenced by a range of factors that, when understood, can give you a serious edge in your trades.

What drives the Forex market?

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Economic indicators: The market's health report

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Think of economic indicators as the health report card of a country's economy. These are things like:

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• GDP growth rate: How fast is the economy growing?
• Employment figures: How many people are working?
• Inflation rate: How quickly are prices rising?

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These numbers are a big deal for currencies. A strong economy usually means a stronger currency. So, if a country is doing well, its currency is likely to be in demand.

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Interest rates: The magnet for money

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Interest rates are like a magnet for money. When a central bank (like the Federal Reserve in the US) raises interest rates, it's like turning up the magnet's power. Investors are attracted to higher returns, so they flock to that currency, pushing its value up. On the flip side, lower interest rates can make a currency less attractive.

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Geopolitical events: The wild card

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Politics and world events can create havoc into the forex market. Things like wars, elections, and unexpected political shifts can create a lot of uncertainty, causing currencies to fluctuate unpredictably. Remember Brexit? That was a prime example of how politics can rock the market.

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Market sentiment: The power of the crowd

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Sometimes, the market moves simply because of what traders think will happen. It's like a self-fulfilling prophecy. If everyone believes a currency is going to get stronger, their actions can actually make it happen. This is why it's important to pay attention to news, analyst opinions, and even what people are saying on social media – it can all influence the market's mood.

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Trade balances: The export-import game

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Countries that export more than they import tend to have stronger currencies. It's like a business that makes more money than it spends – that's a good sign. On the other hand, a trade deficit (importing more than you export) can weaken a currency.

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Other surprises: Natural disasters and pandemics

Unexpected events like earthquakes or disease outbreaks can wreak havoc on economies and currencies. Remember how the COVID-19 pandemic shook up the entire world? That had a huge impact on forex markets.

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As you can see, a lot goes into determining currency prices. By understanding these factors and keeping an eye on the news, you'll be better equipped to navigate the exciting and sometimes unpredictable world of forex trading.

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Learn more about what to look out for in our free courses on Deriv Academy. Remember, knowledge is power!