Forex Trader

New and experienced traders in the foreign exchange (forex) market are willing participants in the largest and most liquid financial market in the world. They are not only up against other speculators, but central banks, foreign governments, international corporations, international financial institutions, tourists and soldiers in foreign countries. The vast forex market is influenced by the actions of these participants. Changes in the supply and demand characteristics of each currency are instantly communicated around the world through exchange rates. An exchange rate is the price of one currency in terms of another currency. Forex traders must pay attention to the participants as well as other factors including economic indicators and geopolitical events.

Central Banks

Without a doubt, central banks exert the largest and most profound influence on the forex market. Domestic monetary policies have large ripple effects throughout the world. Raising interest rates correlates with a stronger currency due to the carry trade. In a carry trade, a speculator sells a currency with low rates and buys a currency with high rates. Lowering rates likewise correlates with a weaker currency for the same reason. The eight major central banks are the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand.

Economic Indicators

Plenty of speculation surrounds the release of key economic reports. Inflation rates, interest rates and Gross Domestic Product (GDP) growth rates are the three big market movers. Higher inflation rates correlate with weaker currencies, which may lead central banks to raise interest rates to combat inflation. This counteracts the effects of the weaker currency and, consequently, it may strengthen. Positive GDP growth rates are normally correlated with strong currencies and negative growth rates with weak currencies. Using economic indicators to trade forex is helpful because otherwise traders are taken by surprise when volatility suddenly jumps.

Commodity Prices

Commodities actually play a major role in the forex market. The currencies of countries rich in commodities like Australia tend to closely track the commodity cycle for various items like gold and oil. Commodity rich countries tend to be heavy exporters, which helps create a favorable balance of trade and a stronger currency. The Australian dollar, the Canadian dollar and the New Zealand dollar are the three currencies that are the most strongly correlated with commodity prices. Take the price of oil. Oil exporters like Canada benefit from rising oil prices, while oil importers like Japan benefit from falling oil prices.

World Events

Elections, natural disasters and war all fall under the category of world events. Elections, both expected and unexpected, are seen as chances for political instability or uncertainty to take hold leading to increased volatility. Significant changes in electoral politics signal alterations in monetary or fiscal policy, both of which are major drivers of exchange rate shifts. Natural disasters are destructive to GDP growth rates. War is even more brutal and can devastate entire economies.

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