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What Moves FX Markets

May 14, 2018 08:30


Forex is a real global marketplace, with buyers and sellers from all corners of the globe participating in trillions of dollars of trades each day. The forex market is made up of currencies from all over the world, which can make exchange rate predictions difficult as there are many factors that could contribute to price movements.

When opening a trading terminal, it is difficult to understand what exactly makes the price move in this or that direction. These factors influence a trader’s decisions and ultimately determine the value of a currency at any given point in time. To perform the fundamental analysis correctly, one should know the aspects that affect the price movement on the currency market and take them into account when deciding which position to open and in what direction.

1.Supply and Demand

Like most financial markets, forex is primarily driven by the forces of supply and demand, and it is important to gain an understanding of the influences that drives price fluctuations here. Currencies’ prices change primarily driven by supply and demand. Supply is the amount of a distinct product or item a seller wants to sell at a particular price. While demand is an amount of a distinct product or item a buyer wants to buy at a particular price. And so the price is going to move with changes in the supply and/or demand. There always has to be a seller and there always has to be a buyer for this to work.

However much the consumers wish to buy vs. the quantity of the item a producer wishes to sell is what makes supply and demand work. If the supply is larger than the demand, the price drops, and if the opposite happens, it goes up. We cannot determine if the imbalance of the supply-demand forces is due to hedging, speculation, or monetary conversion.

2.Central Bank Interest Rates

On a macro level, there is no larger influence in exchange rate values than central banks and the interest-rate decisions they make. In a general sense, if a central bank is raising interest rates, that means that their economy is growing and they are optimistic about the future; if they are cutting interest rates that means their economy is falling on hard times and they are skeptical of the future. This type of visualization may be overly simplified, but it usually is the way central banks respond to changes in their economies.

The complication comes in when traders try to anticipate what the central banks are going to be doing with rates. If traders expect an interest rate hike, they typically begin buying that currency well before the central bank is scheduled to make the decision, and vice versa if they expect the central bank to cut rates. However, if said central bank fails to do as traders expected, the reaction can be quite violent as traders exit their preconceived positions.

3.Capital Markets

The global capital markets are perhaps the most visible indicators of an economy’s health. It is easy to notice the release of public information in capital markets. There is a steady flow of media coverage and up-to-the-second information on the dealings of corporations, institutions, and government entities. A rally or sell-off of securities originating from one country or another should be a clear signal that the future outlook for that economy has changed.

Similarly, many economies are sector-driven, such as Canada’s commodity-based market. The Canadian dollar is heavily correlated with commodities, such as crude oil and metals. A rally in oil prices would likely lead to the appreciation of the Canadian dollar relative to other currencies. Commodity traders, like forex traders, rely heavily on economic data for their trades. In many cases, the same data will have a direct impact on both markets. Trading currency and commodity correlation is a fascinating topic.

The bond markets are similarly critical to what is happening in the forex market since both fixed-income securities and currencies rely heavily on interest rates. Treasury price fluctuations are a factor in the movements of exchange rates, which means that a change in yields will directly affect currency values. Therefore, it is essential to understand bonds an especially government bonds, to excel as a forex trader.

4.Fear and Greed

Momentum can be – and often is – accelerated by human emotion. In other words, when the market pushes on a door and it opens, it keeps pushing. The emotions that drive these moves are fear and greed, which in some senses are actually two sorts of fear – the fear of loss and the fear of missing out. In their simplest forms, fear can turn a falling instrument into an all-out panic and greed can turn a rising market into a blind-buying spree.

The sharp fall in the value of the Turkish lira seen in the summer of 2018 is the perfect example of this trait. The lira had been moving lower all year, but that downside gained extra impetus in August as the central bank failed to raise interest rates as anticipated, and the US unexpectedly imposed trade sanctions on Turkey over the detention of American clergymen. The markets sensed blood and kept selling the Lira. As a result, the lira fell by -26.36% versus the US dollar in a single trading week, taking its YTD losses versus the greenback at that time to just under -70%.

The best way to get to grips with these factors is to experience them for yourself and to do that you need to be watching the markets over key announcements and interest rate decisions, or staying ahead by watching the news flow and social media


Some news is planned and some isn’t, but both can move the market in very extreme ways. News that is scheduled is fawned over by many investors and can move markets on a regimented basis. As for the unexpected events, there’s not much we can do about them; you simply manage risk and hope you don’t get negatively affected.

Not all scheduled news events are market movers. Part of your job as a trader is to recognize when the major market-movers are happening in addition to how to navigate them. For instance, as a general rule, employment reports from the major financial centers tend to move markets more than a manufacturing sales report, and a retail sales figure riles things up more than a monetary supply report.

The Economic Calendar is a great resource to help you determine which reports provide the most punch. While not all important news events like a Non-Farm Payroll release or a central bank monetary policy decision move the needle when their number is called, they have the highest probability of doing so, and knowing when the markets will move can be one of the greatest advantages you have as a trader.


If you are a novice trader and do not have the necessary experience and skills, then before you start trading with real money, you need to learn how to correctly perform fundamental analysis based on the factors that influence Forex market movement described above, otherwise, it will just guessing or even gambling. Just remember that your end of day profits will depend hugely on time you spend doing the homework and paying enough attention to the preparation.

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