Forex FAQs: What Moves The Forex Market?

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Takeaway: The currency market is moved by individuals making decision based on the information they have.

Forex FAQs: What Moves The Forex Market?
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The values of currencies on the foreign exchange market are constantly moving up and down relative to each other as capital flows into one and out of another. Occasionally, a huge influx of capital will push up a certain group or a mass exodus of capital will drop a currency far lower than its peers. All in all, the forex market can seem like a very unpredictable place to put your money. However, there are reasons behind the day-to-day fluctuations in the world’s currencies. In this article, we’ll look at what moves the forex market.

We Want Information!

The easy answer is that information (or sometimes a lack of information) moves the forex market. All in all, any information that reflects on or affects a nation’s economy will also affect a nation’s currency. Since a currency pair is made of two currencies, then the information from both economies will have an impact on their relative value to each other. So, what does this information look like?

Fundamental Information

Fundamental information refers to economic releases, news events and all the other pieces of information that affect the market’s view of a country’s economy. Economic data, such as Interest rate announcements, GDP numbers, changes in monetary policy, balance of trade reports and so on, usually have long-term effects that last until the next set of data is released. News events, like an election upset, the declaration of war or a natural disaster, have significant short-term impacts, but usually fade in the long-term unless they prompt other economic changes (like a monetary policy switch).

Fundamental traders, businesses, corporations, banks and governments scour all the fundamental information floating around in order to make informed decisions. As these decisions are made and capital is moved or trading positions are taken up, the market values of the currencies involved adjust to match the market perception of their true values - as judged by the fundamental data.

At least that is what would happen if wasn’t for the technical data.

Technical Information

Technical analysis - charting, trend lines, patterns and so on - can often take over the market on shorter time frames regardless of the longer term fundamental data. This isn’t to say that technical traders are wrong. The reason technical analysis is so popular is that price action does follow trends and form patterns.

There are a number of schools of thought on the why of this fact, but a lot of it does owe to these patterns being created by the expectations of technical traders. If enough traders believe a breakout is in order and start positioning for it, they will draw the attention of other traders and, in a sense, enable the breakout. Of course, a technical traders would rightly say that the catalyst doesn’t matter as long as the expected pattern emerges.

Leverage, the Great Enabler

Without leverage, the forex market would not be the exciting wild west of financial markets. Whether a trader is using fundamental data or technical data, leverage means that their position will have an impact beyond the actual trading capital the trader has. Multiply this by all the traders and other market participants, and you get a recipe for overreaction and volatility - in other words, opportunity.

Forex's Muddy Waters

It would be nice if someone could authoritatively state that fundamentals move the market in long term trends, technicals move it short-term and leverage just speeds it all up. However, it is simply not true. People are the x factor in forex, and people have thoughts and feelings that can throw fundamental and technical out the window. Market psychology or market sentiment is an attempt to label the phenomenon of the market itself.

At the end of the day, the currency market is moved by individuals making decision based on the information they have digested. Each participant has different interpretations of the information and, very likely, different information to boot. This is what make the forex market so dynamic and enthralling - almost everything affects it, but these factors affect it at different rates of time and to different degrees.


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About Andrew Beattie
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Andrew Beattie has spent most of his career writing, editing and managing financial content as well as more general web site material in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. He has been a long-time contributor to Investopedia.com and is currently venturing forth on ForexDictionary.
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