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What Causes the Forex Market to Move?
Today’s topic is: What causes the forex market to move?
Why is this important?
Understanding what causes the forex market to move will help you diversify your forex trading. This will allow you to trade forex based on news stories and other economic factors.
What’s great is that this often requires no technical analysis.
So what causes the forex market to move?
What causes the forex market to move: Supply and demand
To start, the main cause of movement in the forex market is supply and demand.
However, things do get a bit more complicated when you realise how many factors can affect the supply and demand of a currency.
Here are some of the most important factors affecting supply and demand:
- Election uncertainty
- Government policies
- Central bank policies
Understanding how these three factors can influence the forex market is essential – especially if you want to take your forex trading to another level.
Let’s look at some real-life examples to help you better understand what causes the forex market to move…
The impact of any election on the forex market is often significant.
Since an election often causes uncertainty for a country, forex traders expect the home currency to show considerable volatility during these times.
For example, when former US President Donald Trump went into the 2016 election, it caused plenty of uncertainty for the forex market. One of his policies was to build a wall on the Mexican border and make Mexico pay for it.
What do you think happened?
The Mexican peso sold off against the US dollar.
Lots of forex traders made millions on that trade…
It’s useful to know that most home currencies tend to weaken when going into their election period. That is, the home country of the election pending. The US dollar fell against most major currencies going into the US election, for example.
This doesn’t happen all the time, mind you.
But it’s something to be aware of…
So how can you use this information to your advantage?
Election uncertainty offers an excellent opportunity to trade forex. You can often short a currency during the election run-up and take profits after the president is elected. But you need to consider more factors, such as the ongoing political agenda.
Government policies: The left vs the right
Recent history shows the US dollar appreciates when there is a Democratic president rather than a Republican one.
That may sound odd to you.
But the main reason is that Democratic leaders often have policies that focus on the short-term growth of the economy.
That causes the US dollar to appreciate.
On the other hand, a Republican president usually has a more business-oriented plan. That results in a weaker dollar.
A great example of this is, again, Donald Trump…
While in office, Trump said he wanted to see a lower US dollar to make US exports more competitive.
If Trump had won the 2020 election, we would have likely seen more policy changes favouring US exports. That would have probably caused the USD to fall, presenting an opportunity for forex traders.
This story begs a number of questions during election periods, such as…
- Who is likely to win?
- Is there a firm favourite?
- If there is a firm favourite, how are their policies likely to affect the currency?
Thinking ahead and trading before policy announcements can make you a lot of money in the forex markets.
What causes the forex market to move: Erdogan sacks central bank chief
Earlier this year, Turkish President Recep Tayyip Erdogan hit the headlines after sacking Naci Agbal – the country’s central bank chief.
The sacking of such a prominent figure was indicative of instability in the country. It suggested the economic situation in Turkey was going to worsen.
Let’s wind back the clock…
Naci Agbal was sacked on a Saturday – when the forex market was closed.
Why was this a GREAT opportunity for forex traders?
Forex traders had a few days to react to the news.
As you might expect, many forex traders jumped onto this opportunity. The Turkish lira dropped over 15% in early Monday morning trading. As you can see, understanding how this news would affect the forex market could have made you a lot of money!
It’s that simple…
You can also make money trading on central bank news.
What causes the forex market to move: Central bank policies
You might have heard of the term ‘quantitative easing’ (QE).
QE is when a central bank buys government bonds from banks and other institutions.
The process is quite complex.
But all you need to know is that central banks can print money to buy assets. So look at this as ‘money printing’.
More often than not, money printing leads to a decrease in the value of a currency. This presents an opportunity for forex traders to open a short position.
In 2020, when the US Fed printed billions of dollars seemingly out of thin air, it bought government and corporate bonds to boost investor confidence. The COVID-19 panic caused the US stock market to crash by ~40% in under a month.
This caused a lot of uncertainty.
When the US Fed initiated its money-printing program, the greenback fell to lower levels over the following months.
Forex traders who sold the US dollar short made millions of dollars.
Your ‘Start With Forex’ Takeaway: What causes the forex market to move?
When considering what causes the forex market to move, keep your eye on these three things:
- Election uncertainty
- Government goals
- Central bank policies
Remember, good research will allow you to find profitable trading opportunities in the forex markets. But not everyone has the same political views or investment strategy, which can make this style of trading hard and confusing.
Your ‘Start With Forex’ Takeaway: Understanding what causes the forex market to move will open many opportunities for you. But to be successful at trading forex, you must learn that your opinion can be wrong.
Wrong opinions can make forex traders lose millions.
Indeed, knowing what causes the forex market to move is ONLY the start to successful forex trading. At the end of the day, you need to learn many other skills to become successful.
If you want to learn how to trade forex like a professional, start by reading our FREE forex course. Remember, there’s a million ways to make a million bucks in the forex markets. So if you want a head start in forex trading, alongside our free course, check out our approved products page for forex trading signals and systems to help kick start your trading.
To your trading success,
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