What Moves the Forex Market?

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Do you want to know what moves the forex market? The forex market appears relatively smooth to the untrained eye despite its size. Unlike stocks, there is no crazy gap between currencies when looking at the most popular pairs.

Since forex is so liquid and accessible, it can appear far tamer than it is. However, appearances deceive. Armed analysts, associates, and other mathematicians work around the clock to compile the important data for crucial reports.

The market is pushed by these types of news, leaving a trail of both rich and poor traders. Here you’ll find information about what moves the forex market and how to prepare for it.

Forex Market: What is it?

It is a global market where currencies are exchanged. With trillions of dollars changing hands every day, it is the world’s largest financial market, apart from the derivatives market. Financial markets are also among the most liquid in the world. Those trading over-the-counter (OTC) can do so 24 hours, five days per week due to its decentralised structure.

Foreign exchange quotes represent the ratios of one currency to another, so every transaction involves buying and selling the same currency simultaneously. As well as being called the price, the rate measures the value of a base currency concerning another (counter) currency.

A Euro-US dollar exchange rate is EUR/USD, and a US dollar-Japanese yen exchange rate is USD/JPY.

In addition to these, there is the British pound sterling (GBP), as well as Australian dollar (AUD), and Swiss franc (CHF), Canadian dollar (CAD), or the New Zealand dollar (NZD). Cable is the name given to GBP/USD, and Loonie is given to USD/CAD.

Additionally to the major pairs (the most liquid), minor pairs (for example, EUR/GBP, GBP/JPY) involve major currencies trading against one another.

As well as ordinary pairs, exotic pairs occur when a major currency trades against a currency from a smaller or developing country (e.g., the US dollar and the Thai baht – USD/THB). Lastly, regional pairs are tied to certain geography (e.g., AUD/NZD).

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How does the market move?

Here are some reasons to consider:

1.     Central Bank Meetings (Rate decisions)

Central banks determine the Base Interest Rate to conduct monetary policy. This rate determines interest rates for lending between institutions and controls the economy’s money supply.

The central bank board meets several times each year to discuss rate policies. As a result, interest rates may be raised, lowered, or left unchanged.

The Federal Reserve Bank lowered the interest rate to zero during the recent trend, stimulating the economy by affordable financing. This brought the rate to the lowest point in the US.

2.     Employment Data

Having information on unemployment is crucial since it indicates how the economy is doing.

Even though all countries release this data periodically, the non-farm payroll report from the US Bureau of Labour Statistics is the most important. Non-farm payroll numbers are the most accurate because they exclude seasonal agricultural jobs.

When the worldwide market digests the news during this event, US dollar crosses usually experience wild swings. Price movements of over 1% in either direction are not uncommon.

3.   Economic Growth

Investors assess the economy’s health based on the Gross Domestic Product (GDP) reports each quarter. All the goods and services in the economy are shown in these reports, adjusted for inflation each year.

As forex trades in pairs, the smaller two countries’ GDP estimates trigger a violent reaction, with investors rallying to sell it for the more promising one.

4.   Inflation

Inflation has been a hot topic in recent years. An inflation rate is determined by measuring changes in the price of a standardised basket of goods and services. For example, consumer prices are measured by the consumer price index (CPI).

A central bank monitors inflation to determine how to charge interest rates as another tool for controlling monetary policy. Although data on the economy is released monthly, it is often combined into quarterly and annual reports, often expressed as a year-over-year growth rate.

CPI suffers from 2 biases, so it is not a perfect measure. In the first place, the substitution bias means that people tend to switch products depending on how flexible the demand is.

It is also possible for a basket to be biassed concerning the quality of new goods since it tracks the price but does not capture quality improvements of certain goods. One example is the rapid development of some tech products, such as mobile phones.

5.   Retail sales

Because they are released monthly, they are often used as leading indicators. However, their impact on macroeconomic reports such as quarterly GDP figures is yet to be seen.

In times of economic uncertainty, consumers are more likely to spend, which increases economic activity.

When productivity and wages do not grow while retail sales are rising, this could indicate that people are stocking up for a slowdown. Thus, sentiment shouldn’t be solely determined by retail sales.

The key to success is research.

The best time to trade forex is on the weekend when the markets are closed. However, it takes time and dedication to conduct quality research. Below are some suggestions for conducting actionable forex research:

1. Make your trading schedule around the news. Find out what news has the highest and medium-impact each week.
2. Market news is often covered by the financial media ahead of its release. In addition, analyst revisions and early estimates are sometimes included. Use this information to your advantage.
3. Studies have been done over the years that have investigated seasonality effects between currency pairs. This is important to remember since the seasonal effect is often like gravity.

Staying on top of the news

A variety of news reports capture your attention most of the time, even when the market is moving the most.

To avoid unnecessary risks, day traders check the news schedule in the morning. In addition, you need to monitor fundamental news to manage your existing positions and avoid entering new positions just before news events.

Although trading around news can be profitable, this does not mean that it is impossible. For nonprofessionals, though, it can feel like picking pennies in front of a bulldozer.

What is the real power behind the forex market?

Decentralisation characterises the forex market. Governments set the market through their central banks (to manage monetary policy) and commercial banks (to execute trades). Regulators do not have any control over it.

Just a few global commercial banks handle most foreign currency exchange volume.

Who Trades Currencies?

Forex is used mainly for speculating and hedging by companies and traders. Traders use the former to profit from currency fluctuations, while manufacturers and retailers use the latter to lock in prices for overseas sales.

Forex markets are volatile, aren’t they?

Few markets in the world are as liquid as those within the forex market. Due to this, they are usually less volatile than the rest of the markets, such as real estate.

Multiple factors influence the volatility of a currency, including its political and economic situation. Events such as economic instability in the form of a payment default or an imbalance in the trading relationships with another currency can cause a lot of volatility.

Is the forex market regulated?

Various jurisdictions regulate forex trade. Forex trades can be conducted in countries with sophisticated infrastructures and markets. Due to this, the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) have tight restrictions on forex trading there.

Due to the highly leveraged nature of forex trades, developing countries like India and China have enacted restrictions on the use of capital and firms to conduct forex trades. As a result, forex trading is generally most popular in Europe.

In the United Kingdom, forex trades are regulated and monitored by the Financial Conduct Authority (FCA).

Is it possible to trade in different currencies?

High liquidity currencies have a ready market, and their prices respond to external events smoothly and predictably. Most currencies are traded in the United States. Six of the seven currency pairs appear with the most liquidity on the markets.

It is, however, impossible to trade large lots in currencies with low liquidity without significant market movement. Therefore, currency with low liquidity is typically found in developing countries. When paired with a developed country’s currency, they make up an exotic pair.

Exotic pairs include, for example, the US dollar and the Indian rupee (USD/INR).

Trading forex: basic strategies

Long and short trades are the two basic kinds of forex trades. A long trade bet that the currency’s price will increase over time and the trader can profit from it. Essentially, a short trade entails betting that the currency pair’s price will decline in the future.

As well as using breakout and moving average strategies, traders can also fine-tune their approach to trading using technical analysis.

Trading strategies can be divided into four types based on duration and number of trades:

1. Scalping involves holding positions for a short period, usually seconds or minutes, and limiting the profit based on the pip number. Price swings are predictable, so they cannot handle much volatility. Consequently, traders tend to make such trades at the time of the day when trading is busiest and on the most liquid pairs. As a result, small profits made in individual trades are expected to total a tidy sum at the end of the day.
2. Short-term trading involving holding and liquidating positions on the same day is called a day trade. This can last for a few minutes or several hours. Today traders need important technical indicators and analytical skills to maximise their profits. In the same way as scalping, day trading relies on incremental gains throughout the day.
3. An individual who engages in swing trading holds a position for more than a day; for example, they may hold it for days or weeks. When governments make major announcements, or the economy is in turmoil, swing trades can be helpful. Swing traders do not need to monitor the markets continuously throughout the day because their time frame is longer. Furthermore, swing traders should assess the impact of economic and political developments on currency movements and technical analysis.
4. Traders who use position trades hold currencies for months or even years. Trades of this type provide a reasoned basis for trading, so they require more fundamental analysis skills.

Related questions: FAQs

1.    How does the forex market work?

Investors can take positions on currencies on the currency market, also known as the foreign exchange market (forex market). Investors around the world use currency futures contracts. Investors can buy or sell a currency at a fixed price at a future date with currency futures.

2.    Forex or stocks: which is better?

The value of stocks and forex constantly fluctuates throughout the day, whereas other assets move slowly. The foreign exchange market, however, moves much faster. As a result, while it’s common for investors to hold individual stocks for months or even years, holding currencies is rare.

3.    Do you think forex is a good investment?

The Forex market is highly profitable as it can increase your investment tenfold overnight. Comparatively to stocks, where you can only make a profit when your stock price rises when the value of your currency falls, you still have a lot of money to make in forex.

4.    What is the average day’s income for forex traders?

A Forex trader can make up to $5000 in a single day. A forex trader trades currencies for other currencies.

5.    What is the learning curve for forex?

For most traders, becoming consistently successful in the markets requires years of practice and perseverance. Typically, someone will have to learn to trade forex within a year. You can learn the technical aspects in a few weeks, but you’ll need about a year to learn risk management and psychology.

Bottom line

Day trading or swing trading in small amounts is easier in the forex market than in other markets, especially for traders with limited resources. On the other hand, long-term fundamental trading or a carry trade may be profitable for those with longer-term horizons and larger funds.

Getting an understanding of the macroeconomic factors that affect the value of currencies, in addition to experience with technical analysis, will help first-time forex traders become more successful.

Jason Morgan

Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 15+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.

Forex Content Writer | Market Analyst

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