#OPINIONLEADER#

ByLCMS Traders FX Analysis Team

 FEB 10, 2021

Given that it’s a decentralized market operating 24 hours a day with currencies from all over the world, the forex market is prone to fluctuations that can often be difficult to predict.

However, while difficult, such predictions are not impossible. As long as one understands the factors that cause the market to fluctuate, they’re well-equipped to manage them too.

Some of these factors are discussed below:

1. Governments and Central Banks

The monetary policies of any government are enacted by their central banks, which implement processes that affect their respective currency’s price. The forex market, just like any other market, is also based on the principles of supply and demand.

Hence, the central banks act mainly as the suppliers selling their currencies to buyers.

2. What’s in the News

Commercial banks and financial institutions prefer investing their money where they expect healthy returns, so good news about a country or region boosts the demand for its currencies on forex trading platforms, and negative news does the opposite.

If increased demand isn’t matched by an increase in supply, the price for a currency will go up, whereas decreased demand without decreased supply to match will lower its price.

3. Investor Attention

Also known as market sentiment, investor attention is how the traders feel about the price movement in the forex market. This is often directly affected by the news, and other factors such as historical examples, seasonal factors, and economic outlooks.

This is also where the popular words ‘bearish’ and ‘bullish’ come from. If a trader believes that currency prices will go up, it can be said that they’re bullish. Whereas if someone feels that prices will go down, they’re bearish.

4. Economic Information

The economic data of a country is important for predicting the price movements of its currency, as it is an indicator of the health of its economy and provides an idea of the steps its central bank might take next.

For example, the GDP of a country can be used by traders to confirm whether it’s in an expansionary or recessionary phase, both of which will impact its currency in opposite ways. The unemployment rate, if it increases over a prolonged period, negatively impacts market sentiment and will bring down the price of a currency.

5. Credit Ratings

Much like a bank goes through a customer’s credit report to determine whether they qualify for favorable terms on a loan or a mortgage, investors also look at a country’s credit ratings before investing so as to mitigate their risk.

A credit rating is an external evaluation of a country’s capability of repaying its debts. Higher credit ratings generate confidence in investors and drive up the price of that country’s currency.

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