Economic Trends and Forex Trading: Navigating Market Volatility

Collaborative article

The forex market is inherently linked to economic trends. An important part of being a good trader is understanding the relationship that trading has with these economic trends. Ultimately, your discoveries could shape your trading strategy, so it’s well worth taking the time to get a handle on everything before you start trading on a reputable platform such as Tradu.

Here’s what you need to know.

Global Economic Indicators and Forex Market Volatility 

Key economic indicators include:

• Gross Domestic Product (GDP growth)
• Inflation rates
• Employment rates
• Consumer Price Index (CPI)
• Producer Price Index (PPI)
• Interest rates

All of these factors can influence the forex market, so it’s beneficial to have an awareness of how they can play out within a country. Some people might create an economic calendar designed to help traders seek out important dates, such as Central Bank announcements.

Central Bank Policies and Monetary Policy Divergence 

Central Banks in countries across the world have the power to change monetary policies to adapt to changing economic conditions. This helps them reach price stability, where inflation is low and less erratic.

These policies are put into action with adjustments to the supply of money, which is done through buying and selling securities in the open market. High-interest rates mean that monetary policy is being squeezed. 

Examples of Central Banks with the power to do this include:

• Federal Reserve
• European Central Bank
• Bank of Japan

Forex pairs will differ depending on the interest rates stemming from the countries they represent. If certain monetary policies are put in place, it can impact their value in the forex market.

Geopolitical Events and Risk Sentiment

Geopolitical events can be anything from an armed conflict to political unrest, natural disasters to trade wars. Events like these can have endless social, economic and environmental factors that can cause currency prices to rise or drop. The volatility of the forex market largely rests on occurrences like these. They can influence market risk appetite as a result. Geopolitical events can have long and short-term impacts on currency values, so it’s almost impossible to predict the outcome.

Traders can help to navigate these events by managing their risk exposure and staying on top of current affairs so they can identify opportunities with less of a threat. This will mean keeping up with news outside the UK too.

Long-Term Economic Trends and Currency Valuations

Part of forex trading is about identifying long-term economic trends as well as short-term ones. These might include demographic trends within a country, such as an ageing population, as well as a country’s commitment to certain avenues such as technological advancements, green economy and more. Globalisation, where organisations gain international influence, can also indicate good growth prospects and aid currency prices.