5 Fundamental Factors in Forex
Charts alone do not tell the whole story. If you truly want to have a solid grasp of foreign exchange, then you must spend some time learning about the fundamentals of your chosen currencies. These are the factors that influence value and are directly tied to the issuing country. Many expert traders view these as the key to unlocking long term profits from the currency markets. Here are the 5 fundamental factors in forex:
1. Interest Rates
The interest rate is determined by the central bank of each country. For the United States, there's the Federal Reserve of simply the "Fed". For the European Union, there's the European Central Bank or ECB. For the United Kingdom, there's the Bank of England. They either increase or cut the rate depending on what they deem appropriate for money supply management. Even rumors of a change can increase the trading volume for a particular currency.
2. Gross Domestic Product
The GDP is a measure of the country's rate of production for a given period. The figures are usually released every quarter with the annual average capping things off at the end of the year. Investors are always keen to see how much an economy has grown from year-to-year. Negative percentages indicate a recession which tends to pull the currency down. Meanwhile, a higher than expected growth rate will lift it up.
People are the engines of growth. They need to be engaged in productive labor in order to contribute to the country's GDP. One of the tasks of governments is to ensure that there are enough jobs for their constituents. A low unemployment rate around the single digits is ideal. At least, there should be some significant improvement from the last release of data for investors to be impressed and the currency to rise.
There are a lot of currencies that have historical ties to particular commodities prices. This happens when a country's economy is heavily dependent on a sector which either uses or creates a product. A good example would be the Australian dollar and the price of gold. The mining industry is massive in Australia where most of the world's gold is produced. If gold drops in value, then it is likely that the AUD will follow. Canada, on the other hand, is a big oil exporter so the Canadian dollar tends to rise and fall together with the price of crude oil.
5. News and Events
The direct involvement of governments to currencies via their central bank means that political events can have a massive impact on fluctuations. An outbreak of war or similar conflicts between nations may destabilize their economies sending their currencies on a downward spiral. Natural disasters that damage infrastructure and livelihood may also cause economic growth to slow down.
Study these 5 fundamental factors in forex for every currency pair that you wish to trade if you want to enhance your chance of winning trades.