Large currency movements are usually driven by big stories and interest rates in financial markets. In the United States, for example, Fed Chairwoman Janet Yellen will step down in 2018, and a new Fed, Jerome Powell, has been appointed by the president. Changes in economic policy and ideology between the outgoing chairperson and the incoming one will affect the foreign exchange market.
When it comes to financial markets, staying on top of the big story is key to your success as a trader. For example, when Great Britain voted to leave the European Union (EU), most financial markets around the world saw a sharp swing in response to the vote. While this was an extraordinary event, we cannot rule out the possibility that it could have a profound effect on the value of a currency. These events include but are not limited to the following:
Possible or actual change in government
The economic crisis
Chief announcement of Finance Minister and Central Bankers
Central bank intervention
War and terrorism
Economic policies of different countries
In recent years, we have seen many developments that have greatly affected the currency market. The euro was widely devalued in England’s vote to leave the EU. The world economy was affected when the Greek government was on the verge of bankruptcy. The Venezuelan bolivar has become almost devalued because of their economic policies. These are just a few examples and many more.
A wise forex investor follows the news because they can help predict the market. By following major news events the gains can be great and the losses can be minimized.
Interest rates are the most important long-term driver for a currency. Globalization has made it easier for investors to transfer money from one country to another in search of higher yields. For example, in the United States an investor can get an interest rate of less than 1% whereas in Argentina they get an interest rate of 20%. Where would you rather save your money? When a central bank changes its core interest rate, it affects the cost of borrowing for individuals, corporations and even the government. For businesses, higher rates mean higher borrowing costs, making capital investment less attractive. For individuals, this means higher credit card, car and mortgage payments, with the goal of slowing growth. On the other hand, lower interest rates are generally aimed at boosting economic growth.
In the long run, higher rates slow down economic growth. Interestingly, in a short period of time, high interest rates tend to be bullish for the currency. When investors transfer their funds to countries with the highest interest rates, the value of that currency increases. The price action after the decision shows how monetary policy changes can trigger big moves that can last for days or even weeks at a time.
This article is provided by Forex Traders Blog (FTB). The goal of the FTB is to keep foreign exchange investors informed about technical analysis techniques and major news events that could affect the currency market. Blog access is free.