The Forex markets provide a bevy of challenges and opportunities for novice and seasoned investors seeking outsized gains in the international currency sector. At the same time, learning to navigate these markets from a technical standpoint can present a multitude of difficulties. To help mitigate some of these risks, understanding better the fundamental factors that influence the Forex markets can prove impactful. The following factors significantly impact price action in the currency markets:

  • Rates of Economic Growth
  • Interest Rates
  • Commodity Prices
  • Geopolitical Conditions
  • Economic Expansion

Trade balances and economic growth play a significant role in shaping the perception of a country's currency value. Traditionally, nations that export at higher rates than they export often have high value currencies. Debtor nations often have weaker currency values. Within a trading atmosphere, economic data reports related to growth can precipitate short-term moves in a currency which can be profitable opportunities for experienced traders. For longer-term investors in the Forex world, understanding the structural economic forces at work for a given country can enable them to benefit significantly from market moves. For example, investing in a nation with a strong trend of running trade surpluses can present an investor with outsized gains overtime.

Rate Environment

Like economic growth, interest rates can significantly impact the value of currency pair. Interest rates are dictated by a nation's central bank, and changes in rates can precipitate moves in its currency. For example, if the central bank changes its key rate, that is, the rate at which banks charge each other for lending, this can alter the value of a currency in the Forex market. By cutting interest rates, nations can essentially debase their currency trying encourage exports and making the country more attractive for investors. The thinking is this will stimulate economic growth. Over the last few years, the United States central banks have debased the currency reducing its value. Savvy Forex traders have shorted the U.S. Dollar during this time period for profit while pairing it with long bets on the Euro, which represents largely the strong export economy of Germany.

Commodity Markets

Rising commodity prices can have impact on nations in different ways. For example, rising oil and gold prices generally help the currency of commodity exporting nations such as Canada and Australia. More investors will seek to allocate capital to these national economies to benefit from the economic growth, thereby increasing the value of the Canadian and Australian Dollars. Conversely, the United States Dollar typically falls in value when commodity prices in oil and gold rise. A savvy Forex trader would seek to capitalize on this dynamic by going long the Canadian dollar and shorting the U.S. Dollar.

Geopolitical Conditions

Given the Forex exchanges are open around the clock five days a week, geopolitical events can precipitate fast and sudden moves in the marketplace for international currencies. For example, a news event concerning a violence in the Middle East may cause oil prices to rise on fears of weakening supply and precipitate downward pressure on the U.S. Dollar and potentially upward momentum for the Canadian Dollar. Again, a nimble and intrepid currency investors may seek to game the news regarding geopolitical conditions to exploit a fast move in the currency markets. These types of moves can be lucrative, yet highly risky. Novice traders should seek to hedge any positions opened around geopolitical events thoroughly to protect their downside.


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