Key Indicators to Watch in the Currency Exchange Markets

It all makes a world of difference when you’re trading in Forex market and you know what exactly to look out for! The currency exchange market is governed by multiple factors, and the basic indicators can assist traders to forecast the market movement and shave down the risk on trading and take advantage of valuable opportunities.

All of this is of huge importance to us; GDP growth, inflation rates, employment figures and we need to keep a very close eye on everything. These data points are fairly straightforward evidence of the state of a country’s economy and its currency’s power or lack thereof to get ahead or get stuck. A good example is that an ascending GDP usually hints at a good economy, which could push up the currency value. However, an economy that suffers from too much inflation has a depreciating currency, which is less attractive itself to investors. Lower unemployment often means that the economy is stable, and this in turn increases the value of the currency.

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Another big region to watch is central bank policies. Forex trading markets are highly sensitive to central bank policy, as it’s the prime decision maker in deciding how interest rates will be controlled. Raising interest rates tends to strengthen a country’s currency, as foreigners invest on high interest rate compared to their countries. Alternatively, when the rates are lowered, then the currency may weaken due to investors searching for higher returns elsewhere. They also offer guidance to central banks on future monetary policy and the consequences for the market.

Another variable for Forex traders to be aware of is Forex geopolitical events. Volatility can be brought in currency markets by political instability, wars, trade conflicts and elections. Take the Brexit vote in 2016 for example; the vote brought with it huge swings in the British pound, as traders adjusted their positions as to whether the UK, then part of the EU, would leave. Trade tensions also between major economies such as the US and China can also impact currency values and create market reaction.

Also, commodity prices, as well as the rates of both currency exchange, can be affected. For instance, if oil prices rise, then oil exporting countries such as Canada or Russia will see an increase in their currencies. For instance, a drop in commodity prices can hurt the currencies of those same countries. Traders who have knowledge of commodity markets are often times better equipped to forecast movements in currencies which have been connected to the flows in those markets.

More on that topic is market sentiment; this is usually seen in the investor’s confidence and risk appetite. Investors in times of global uncertainty or a financial crisis naturally look for safe-haven currencies, such as the U.S. dollar or Swiss franc. In more stable conditions, investors then might turn to riskier currencies as a way to achieve higher returns. Forex traders that stay in tune to market sentiment can perceive the variations in currency demand that result from global events or economic changes.

Also, the technical analysis has to be understood to engage in Forex trading. Price charts, in fact, using moving averages and other technical tools, can establish trends to identify where a currency is likely to go. Obviously economic data and news is important, but technical analysis gives us information that can be acted upon immediately and within the near future by how the participants in the market behave.

Finally, a variety of indicators to be aware of as a Forex trader are summarized. That could be any economic data, central bank policies, a major geopolitical event, or even market sentiment, and if traders know how to read it all; they can make smarter trading decisions.