Big movements in currencies are usually driven by big stories in the financial markets and the direction of interest rates. For example, in the US, the Fed Chairwoman Janet Yellen will be leaving her post in 2018 and a new Fed, Jerome Powell has been appointed by the President. The changes in economic policies and ideologies between the exiting Chairperson and the incoming one will have an impact in the foreign exchange market.
The Big Stories
When it comes to the financial markets, staying on top of the big stories is critical to your success as a trader. For example, when Great Britain voted to exit the European Union (EU), most financial markets worldwide saw tremendous swings downward in reaction to the vote. While this was an extraordinary event, we cannot dismiss the events that can have a profound impact on the value of a currency. These events include but are not limited to the following:
Potential or actual changes in government
Major announcements by finance ministers and central bankers
Intervention by central banks
Wars and terrorism
Economic policies by different countries
In recent years, we have seen many events that have drastically affected the currency markets. The Euro was drastically devaluated with England’s vote to exit the EU. The world economy was affected when the Greek government was a the verge of bankruptcy. The Venezuelan Bolivar has been rendered almost worthless by their economic policies. These are just a few examples and there are many more.
A wise Forex investor follows the news as they can help predict the market. The profits from following major news events can be great and the losses minimized.
Interest rates are the most important long-term driver for currencies. Globalization has made it easier for investors to shift money from one country to another in search of a higher yield. For example, an investor in the US can get an interest rate of less than 1% where in Argentina they would get an interest rate of 20%. Where would you rather have your money saved? When a central bank changes its key interest rate, it impacts the borrowing costs of individuals, corporations, and even the government. For businesses, higher rates mean higher borrowing costs, making capital investments less attractive. For individuals, it means higher credit card, car, and mortgage payments, which are aimed at slowing growth. Low interest rates, on the other hand, are usually aimed at boosting economic growth.
Over the long run, high rates tend to slow down economic growth. Interestingly, in the short run, higher interest rates tend to be bullish for the currency. When investors move their funds into countries with the highest interest rate, the value of that currency increases. The price action after the decisions shows how monetary policy changes can trigger big moves that can last for days and even weeks at a time.
This article was provided by the Forex Traders Blog (FTB). The FTB aims at keeping Forex investors informed on technical analysis strategies and major news events that may affect the currency markets. Access to the blog is free of cost.