Large currency movements are often driven by big stories in the financial markets and the direction of interest rates. For example, in the United States, Fed Chair Janet Yellen will step down in 2018 and the chair will appoint a new Fed, Jerome Powell. Changes in ideologies and economic policies between the outgoing president and the incoming president will have an impact on the foreign exchange market.
The great stories
When it comes to financial markets, keeping up with the big stories is critical to your success as a trader. For example, when Britain voted to leave the European Union (EU), most financial markets around the world experienced huge downward swings in reaction to the vote. While it was an extraordinary event, we cannot rule out events that can have a profound impact on the value of a currency. These events include, but are not limited to, the following:
Possible or real changes in government
Important announcements by finance ministers and central bankers
Intervention of central banks
Wars and terrorism
Economic policies of different countries
In recent years, we have seen many events that have drastically affected the foreign exchange markets. The euro devalued drastically with England’s vote to leave the EU. The world economy was hit when the Greek government was on the verge of bankruptcy. The Venezuelan Bolivar has been almost useless for its economic policies. These are just a few examples and there are many more.
A wise Forex investor follows the news as it can help predict the market. The benefits of following important news events can be great and minimize losses.
Interest rates are the most important long-term engine of currencies. Globalization has made it easier for investors to move money from one country to another in search of a higher return. For example, an investor in the US can get an interest rate of less than 1%, where in Argentina he would get an interest rate of 20%. Where do you prefer to save money? When a central bank changes its key interest rate, it affects the borrowing costs of individuals, corporations and even government. For companies, higher rates mean higher debt costs, making capital investments less attractive. For individuals, it means higher credit, car and mortgage payments, which aim to slow growth. Low interest rates, on the other hand, are usually geared to boosting economic growth.
In the long run, high rates tend to slow economic growth. Interestingly, in the short term, higher interest rates tend to be bullish for the currency. When investors move their funds to countries with the highest interest rate, the value of that currency increases. Price action after decisions shows how changes in monetary policy can cause large movements that can last for days and even weeks at a time.
This article was provided by the Forex Traders Blog (FTB). The FTB aims to keep Forex investors informed about technical analysis strategies and major news events that may affect the forex markets. Access to the blog is free.