The forex market, considering it is tied to currency and the exchange rate, has multiple factors that can influence it. These range from political changes or policies, a trade situation, investment, and more serious aspects such as a natural disaster or war.
OANDA keeps up to date with these changes and ensures clients are still able to trade no matter what. However, whether you are an experienced trader or a beginner, it is important to take note of these factors.
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Politics
Politics is certainly a driving force behind how strong or weak a currency is and can therefore significantly impact your forex investments. The American Dollar strengthened after Joe Biden was voted in due to the belief in his promises to improve the US economy.
Policy additions and changes also have an impact on a country’s economy and currency. Adding policies that improve investment, raise export, etc., all strengthen an economy. Whereas policies that have a negative impact on these sectors will generally weaken a currency.
Environmental Damage
While not usually an issue for larger countries like the US, an environmental disaster can cripple an economy for a period. Drought is common in Africa and sometimes the Middle East; having to divert funds for relief is not attractive to investors or those trading with one of these countries.
While not an environmental issue, war is another factor as it puts the economy in limbo, and environmental disaster has a similar impact.
Trade
An increase or decrease in imports and exports has one of the biggest influences on the strength of an economy and currency. There is a clear connection between countries that are heavily involved in importing and exporting goods and countries with a strong currency.
Even on a smaller scale, a country discovering a mineral or oil reserve will have its economy strengthened almost overnight. The currency will go through the roof as the inevitable investment and trade begin.
Employment Rates
Employment rates are one of the best metrics for judging the strength of an economy. The less unemployment there is the more people with money, paying taxes, spending it on goods, imports, services, etc.
On the other hand, mass unemployment is a sign of a weak economy, and a poor economy, and is generally unattractive to foreign investment. In simple terms, the better the employment rate, the stronger the currency.
Inflation
Lower inflation rates tend to strengthen currencies, with high inflation rates having the opposite effect. Zimbabwe is a prime example of a country that has exorbitant inflation rates and a currency that is barely worth anything on a global stage.
Money also doesn’t care why there is inflation; the economy will react the same way almost every single time. Inflation is also a currency killer and can have devastating and lasting effects for years.
Government Debt
Government debt is another factor that is relatively easy to understand. A government that is deep in debt is hard to trust and hard to invest in. However, there are exceptions, but this is a general concept.
Public debt is another sign of a weak economy as wages aren’t good enough or not enough people are earning enough money to live comfortably. Whether it be on a micro or macro level, mass debt is not a good thing.
Investment
As mentioned a few times already, investment is another driving force behind economic strength. Billions and billions of dollars are spent every year on investments, with countries using this money to build up their economy, trade routes, etc.
Economic planning is a factor that drives speculation. Governments’ fiscal projections give foreign investors a good look at the financial future of a country. This allows them to plan appropriately and start investments early.
Economic Strength
General economic strength is another major factor and one that some countries don’t have to make a special effort to achieve. Numerous countries have control over their debts, a solid import and export strategy, and their citizens are employed and looked after.
Nordic countries are an excellent example of relatively strong countries in all sectors. A country like the US, on the other hand, may have a massive import and export sector, but public health isn’t as good as it could be.
