With buyers and sellers from every part of the world engaging in trillions of dollar trade daily, Forex is undoubtedly a global marketplace.
Macroeconomic situations have been influencing the market more than ever before; this is as a result of the rapid globalization recorded in the activities of the foreign exchange market. There are some inevitable factors that affect the market either positively or in a negative light. In this guide, EagleFX will be treating two of those factors namely – Economic Impact and The Capital Market.
Economic Impact on Forex
For any trader to stay relevant in a competitive and fast-paced market like Forex, they need to chew economic reports at any given time. GDPs are the control of every country’s economic strength and performance, they are called lagging indicators since they report already occurred trends and events.
Another essential indicator that cannot be undermined is inflation. It basically circulates signals about the drop of purchasing power and the increase in price level. Some persons have the perception that inflation is a weight that causes a downward trend on a currency as a result of retreating purchasing power; hence it’s a double-edged sword. However, EagleFX reports that it can also lead to currency appreciation in cases where central bankers are forced to increase rates in order to constrain the rise in inflation level even though it is heavily argued amongst economists.
Other economic factors such as manufacturing index, capacity utilization employment levels; retail sale etc also conveys vital information on the present and predicted toughness of an economy including its currency.
Capital Market Influence on Forex
While the stock and bond markets are the most obvious markets worldwide, the global capital markets on the other hand are the most conspicuous. With the substantial discharge of information on institution and government bodies, corporation dealings, constant media coverage, it is almost impossible to miss the discharge of public information open to the capital market. To a keen investor, it only takes a sell-off or wide rally of securities emanating from one country or another to see strong signals and predict that the future direction of the said economy has changed. It might be long or short term.
Good examples are sector- driven economies of which Canada is a perfect case. The movement of commodities like metals and crude oil massively affects the Canadian dollar in the commodity-based market. Its appreciation to other currencies will now solely depend on the hike in oil prices. Forex traders who trade on commodities depend heavily on economic updates and data to safely trade, according to EagleFX, the data will exert direct influence on the two markets in some cases.
The bond market is another determinant of most happenings in the forex world. This is as a result of how heavily currencies and fixed –income securities depend on interest rates. In this case, it’s quite imperative for every forex trader to have a solid understanding of how bonds are highly valued especially bonds with the government.