When you first enter the world of currency trading and Forex there is a seemingly never-ending amount of stuff to learn. Charts, graphs, diagrams, and software are usually what occupies the mind of novice traders at first. However, once the time for learning these fundamentals is over, it’s time to sit down and try to make some trades.
It’s around this point that many new traders freeze, realize that they have no idea of what kind of global and local events are going to alter currency values and make guesses (and bad trades).
If this sounds like you, then today we are going to provide you with a brief overview of the kinds of things you should be looking out for. This is not a comprehensive (or even a detailed) guide, but it should direct your thinking in the right kind of direction.
Let’s get started.
“News releases” is a very general term we are using here today. We’ve made it intentionally ambiguous because there’s a whole host of different information that can be released by the media that affects the value of a currency. Things like financial statements, budget forecasts, company profit warnings, trade deals and an almost infinite amount of other things can be announced via the news (and it’s not always accurate).
Traders will almost always learn about the other factors we are going to discuss today via news releases, as such – it’s important to map out how and where you’re going to get your information from. Learning how to digest news releases (and how to separate golden information from the noise) is a subject worthy of its own article – check this out as a starting point if you want to learn more.
Inflation rates are one of the biggest determining factors of how much a currency is worth. It’s a reasonably simple concept to understand, but it’s a fundamental one. A general rule of thumb (all other things being equal) is that a lower inflation rate means a currency is worth more. A higher inflation rate means that each dollar, pound, euro, or yen will buy you less than it did previously, and by definition, the currency is weaker.
Interest rates are another huge game changer for currency valuations. Whenever a central bank raises or lowers its interest rate it’s big news on the financial markets, even if it’s a fraction of a percent. Higher interest rates mean that banks and lenders are going to be making more money on the lines of credit they extend, lower interest rates means the opposite.
Political stability is another major thing that affects currency valuations that should be taken into account. Investors ideally want to invest in a country that is politically stable, political upheavals, revolutions, war, and other things of that nature are all very bad for business. Signs of potential political instability can instantly and dramatically weaken the value of a currency. Conversely, a strong and stable country led by a popular and reliable government does the opposite.
So there you have it, a very general, and a very brief overview of the kinds of things you should be looking at and monitoring that can change the value of a currency. This is not even the very tip of the iceberg, people spend their entire lives learning the minute details of what can affect currency valuations.
But at the very least, it’s a start.