Changes in the foreign exchange (forex) market are constant. You can’t always predict what the price changes will be, whether a rise or fall, or by how much, but one thing you can be sure of – they will change.
But what is forex trading? In simple terms, it’s the process of trading one currency against the other, on one of the most highly liquid financial markets available.
With a definition like this, it’s unsurprising that continuous changes are inevitable in the market. Some of the biggest stimuli for change come from the vast range of external factors, which heavily affect the movements of the forex market.
In any of form trading, external influence is always a major consideration for traders. Arguably, this is most essential in the forex market.
The list of factors that can affect the forex market is endless. It includes things such as economic changes (inflation and interest rates), as well as turmoil in a country (wars, natural disasters, political instability).
To best give you an idea of the extent to which these factors can affect the forex market, read on, to see a round-up of the main factors that are affecting the market at present (March 2022).
Russia’s Invasion Of Ukraine
Since the first attack on February 24th, Russia’s invasion of Ukraine has hugely shaken the economies of the world. Among the vast range of impacts the war has had, one of the biggest effects has been on the forex market.
The invasion has massively increased interest rates across the Eurozone. It has disrupted many businesses in Ukraine, and production and supply have been halted. Considering Ukraine is the main global supplier of sunflower oil – supplying 60% alongside Russia – this has had a huge impact on the Eurozone.
Also, Russia supplies 40% of Europe’s natural gas imports, and with trading sanctions preventing air and sea shipments coming from Russia to Europe, this has hugely risen the price of gas. As of March 7th, European gas prices have hit an all-time high of €345 per megawatt-hour.
With these major impacts in play, Europe’s inflation rate rose to a record-high of 5.9% in February 2022, from 5.1% in January of the same year.
With an increase in inflation, this naturally means a significant decrease in the value of the Euro (EUR). This is evident in the fact that the EUR/US Dollar (USD), fell from $1.13 on February 24th to $1.08 on March 7th.
Therefore, it is clear to see how Russia’s invasion of Ukraine has been a major factor affecting the forex market.
Interest Rates In The US
The US Federal Reserve can have a huge impact on the value of the USD, in the way it manages interest rates.
Often – but not always – an increase in interest rates leads to an increase in the value of a currency. As interest rates rise, it encourages more investors to take advantage of a potentially greater return on investment (ROI), and this strengthens the currency.
On March 16th, the Federal Reserve increased interest rates for the first time since December 2018, with a 0.25% rate hike. Since then, many investors have predicted even further hikes in May and June, all in an attempt to combat the rising inflation rate in the US.
In response, the value of the USD has begun a steady rise over the EUR from March 18th until present time, implying that many investors have an aim to potentially profit from rising interest rates.
Where this will go remains to be seen, but the undeniable fact is that the interest rates of the US are heavily influencing the forex market.
Cost Of Living Crisis
One final factor that is currently affecting the forex market, is the cost-of-living crisis that is sweeping through the UK.
The rising prices across the UK have produced a 30-year high inflation rate of 6.2%, which is the highest since March 1992 (when it rose to 7.1%). Inflation rose across 10 of the 12 categories that contribute to the consumer price index (CPI)– which measure the average change in prices of goods over time.
As the cost-of-living has significantly risen throughout the UK, the value of its currency has naturally taken an appropriate hit. The value of the Great British Pound (GBP) has fallen significantly against the USD, going from $1.35 on February 23rd, and steadily dropping to $1.30 on March 15th.
When the cost-of-living rises to an unmanageable level, it can often result in a weakening of the country’s currency, as seen here in the changes of the GBP.
External factors are essential when it comes to movements in the forex market, and there are countless events happening continuously, that will affect your trades. Thus, be sure to keep a watchful eye on these happenings, in order to increase your chances of profitable, risk-reduced forex trades.
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