Fundamental Analysis: Key Factors That Affect The Forex Market
Fundamental analysis analyzes the fundamental factors that drive the economy of a specific entity, such as a stock or currency. It uses an economic cycle model to analyze economic data, policy decisions, sociocultural, and other elements in order to forecast market movements and trends.
The first key factor that affects the forex market is the interest rates of the central banks. On a macroeconomic scale, central banks and their interest-rate determinations have the most impact on currency exchange rates. In other words, both central banks’ interest rates and currency exchange rates are inextricably linked. Generally speaking, if a central bank raises interest rates, it indicates that their economy is expanding and they are positive about the future prospects; if they lower interest rates, it indicates that their economy is contracting and they are concerned about the future prospects. This manner of representation may be extremely rudimentary, yet it is typically how central banks adapt to economic shifts.
The issue becomes complicated when traders try to predict what central banks will do with interest rates. Traders often start buying a currency even before the central bank is set to decide if they anticipate an interest rate hike, and inversely if they anticipate a decrease in the interest rate. Therefore it can be said that if the central bank fails to perform as expected by investors, the result can be rather unpleasant, as investors abandon their planned positions and suffer significant losses. As a result, central banks attempt to be as transparent as possible about their policies.
Another factor that affects the forex market is that when the value of a currency causes unwarranted damage to an economy, the central bank of that country may feel compelled to intervene and directly affect the value in its favor. It is yet another factor on which the currency’s pricing is based. For example, when a country’s currency appreciates dramatically, central banks must intervene and take measures to prevent the currency from overestimating and severely damaging the economy. At this point, the forex market will be flooded with the currencies as reserves by the central banks. The availability of currency to the general public devalues both the money and the currency.
Besides that, forex options is also another factor that affects the forex market as the fast-moving market that simulates a psychologically significant area of interest. The majority of the volume traded in FX options is for foreign commercial purposes, which means that companies may protect themselves against currency value fluctuations. However, a significant portion of the traded volume is devoted to speculating.
Speaking of psychological areas of interest, both fear and greed are always associated with the forex market, in the sense that they have immediate and interrelated market impacts. Though it is impossible to detect that impact until it has occurred, the trader faces a challenge in assessing it in the present when it is occurring. On the other hand, greed may turn a booming market into a reckless purchasing craze, while fear can turn a declining market into a panic zone or a catastrophic downturn.
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