What Affects the Forex Markets?

The forex market is one of the busiest and most volatile in the world – with an estimated $5 trillion changing hands every single day. Volatility explains the attraction too, with a fluid market of rises and falls offering plenty of opportunity for savvy traders to make money.

But, whether you’re a seasoned investor or a newcomer looking to join the party, it pays to understand the sort of factors that can cause volatility in the forex markets.

A Matter of Supply and Demand

The price of a currency – like any other asset – is determined by supply and demand. A strong economy that is growing will be attractive to investors and, therefore, be in demand. Provided that supply is constant (more on that in a moment) the price will rise.

What Causes Positivity?

If demand is sparked by positivity, it's important to understand what might help that positivity.

This can come from a variety of sources, such as news from key economic bodies such as think tanks, central banks and credit agencies or even as the result of natural disasters, war and terrorist attacks.

Politicians, too, can play a part in this narrative. The words key leaders say and the actions they take help to set the tone for their administration and its priorities and the markets, inevitably reaction. This interactive guide from DailyFX has looked at 59 key dates for six key leaders to show the impact – positive, negative or neutral - on the currency market from high profile event from the news agenda in the last 12 months.

Politics matters – as does the global nature of modern politics. Talk of a trade war between the US and China drew worried glances from countries across the globe, with many nations reliant on the fortunes of these economic superpowers.

On top of that, you shouldn't lose sight of the power of momentum. If enough people start to have confidence in a currency and begin to trade on this sentiment, this will create a positivity bubble that helps to drive up demand and the price of its own accord.

How Supply Might Change

In recent years, many central banks have stepped in to try to avoid inflation creating economic issues. Quantitative easing – colloquially known as 'printing money' despite the fact that the process is digital – has involved pumping money into an economy and so, as a result, boosting supply. The Bank of England's QE programme has been worth £435 billion. Central banks, therefore, might use supply levers to keep the impact of demand in check.

There's a lot, therefore, for traders to take in. It's not an exact science – an even veteran investors make mistakes – but the fast-paced nature of forex is ripe with opportunity.

 ...Continues here - Trading Commodities

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