What Moves Currency Prices?
What Moves Currency Prices?
The forex trading market is the largest market in the world. Every day, trillions of Dollars in assets through foreign exchanges, and these markets have quickly gained the attention of many as there are significant opportunities to make money 24 hours a day. But with such a large market, how could we possibly understand what actually moves forex prices with any degree of precision? More importantly, how could anyone actually forecast where trillions of Dollars in currency could move tomorrow?
The reality is that we need some answers to these questions in order to actually make consistent money in forex trading. Here, we look at some of the factors that drive forex prices.
The Importance of Macro Data
The education of any serious investors in forex markets must include an understanding of macroeconomic data, and the influence these releases have on their associated currency. Economic calendars can easily be found on many reputable websites, and it is highly critical to watch these events live as they occur. It is true that most of the daily transactions in forex markets are not speculative in nature. That is, these are regular market transactions that are done across borders (such as when a consumer buys a product from another country). But if you want to learn how to trade forex properly, you will need to watch the market events that are on the radar of other investors.
Differentiating between all the data reports takes patience, but is important because each influences forex prices in different ways. For example, rising inflation numbers are usually bullish for a currency because this makes it more likely that country’s central bank will need to raise interest rates. But what about a rising unemployment rate? Will this have the same effect? Almost never, because this means that economy is stagnating and that, perhaps, interest rates in that country are already too high.
The Importance of Price Momentum
The next major factor to consider is the importance of price momentum. Bull or bear markets can reach extreme levels before turning, and this is generally because most of the market is trading in line with broader sentiment. If most of the market feels a certain way about an asset, it can take long periods of time for those views to change, and there is always the potential for prices to trade out of line with market fundamentals as this happens. In these cases, it is important to turn back to macroeconomic data in order to justify or refute valuations seen in the market.
A detailed explanation of all relevant data reports is beyond the scope of any single article. For this reason, it is important to choose a broker with a good selection of forex education materials. This is something that many brokers provide but it is important to choose one with a knowledge base that matches your trading style. Once you have a firm understanding of these factors, predicting the next move in forex markets will start to become much easier.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.