Large currency movements are usually triggered by big stories in the financial markets and the direction of interest rates. For example, in the U.S., Fed Chairman Janet Yellen will leave her post in 2018, and a new Fed, Jerome Powell, has been appointed by the president. Changes in economic policies and ideologies between the current and future chairman will have an impact on the foreign exchange market.
When it comes to financial markets, staying up to date with big stories is crucial to your success as a trader. For example, when the UK voted to leave the European Union (EU), most financial markets around the world recorded huge downward changes in response to the vote. While this was an extraordinary event, we cannot rule out events that could have a profound impact on the value of the currency. These events include, but are not limited to, the following:
Potential or actual changes in government
Main announcements of finance ministers and central banks
Central bank interventions
Wars and terrorism
Economic policies of different countries
In recent years, we have seen many events that have drastically affected the currency markets. The euro has been drastically devalued by England’s vote to leave the EU. The world economy was hit when the Greek government was on the verge of bankruptcy. Venezuelan Bolivar is almost worthless with its economic policy. These are just a few examples, and there are many more.
A wise Forex investor follows the news because they can help predict the market. The profits from following the headlines can be large and losses minimized.
Interest rates are the most important long-term driver of currencies. Globalization has made it easier for investors to transfer money from one country to another in search of higher returns. For example, an investor in the US could get an interest rate of less than 1%, while in Argentina he would get an interest rate of 20%. Where would you rather save money? When a central bank changes its key interest rate, it affects the cost of lending to individuals, corporations, and even governments. For companies, higher rates mean higher borrowing costs, which makes capital investments less attractive. For individuals, this means higher payments by credit cards, cars and mortgages, which aim to slow growth. On the other hand, low interest rates usually aim to boost economic growth.
In the long run, high rates tend to slow economic growth. Interestingly, in the short run, higher interest rates are usually currency. When investors move their funds to the countries with the highest interest rates, the value of that currency increases. Price action after decisions shows how monetary policy changes can trigger big moves that can take days or even weeks.
This article was provided by Forex Traders Blog (FTB). The goal of the FTB is to inform Forex investors about technical analysis strategies and major news that may affect the currency markets. Access to the blog is free.