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Economic Factors That Affect Forex Exchange

Economic Factors That Affect Forex Exchange

A shift in the economic state of a country will affect its forex exchange currency value.  Economic data and news announcements have a dramatic effect on the currency value of a country.  The factors that affect a country’s economic state include inflation, consumer confidence, interest rates, unemployment, gross domestic product and its political climate.

Gross Domestic Product

The gross domestic product of a country is the total amount of all its services and finished goods that it has generated during a specific period of time.  Gross domestic product uses government spending, net total exports, private consumption and business consumption for its calculations.  The GDP of a country is considered to be the most effective indicator of the health of a country’s economy.  When the GDP is on the increase, it indicates positive growth in a country’s economy.

Employment and its Effects on Forex Exchange

Most countries release regular update on the number of employed and unemployed persons in their country.  The United States releases a monthly report called non-farm payrolls that lists the details related to employment data.  The normal trend is that dramatic increases in the employment rate indicate a positive economic growth.  By the same token, a decrease in employment levels could be an indication of an economic downturn.  These are the general trends, however, these figure have to be viewed in relation to the country’s current economic climate.  An example is a country that has been through economic upheaval.  If the employment figures had to rise in this situation, it could affect the country’s currency in a positive manner, as the upswing in employment levels could be a sign of recovery and economic health.  In a volatile economy, the increased employment level could lead to inflation which would reduce the value of the currency.

Retail sales

This figure is indicative of the amount of sales among retailers within a country.  This indicates the level of consumer spending.  The data is collected from a group of stores to provide a view of consumer spending levels.  Increased spending is indicative of a strong economy.

Geopolitical and Macro-Economic Factors

The most significant foreign exchange changes are often the result of geopolitical and macro-economic events, such as changes to the monetary policy, financial crises, elections and wars.  Events of this magnitude are able to reshape or change a country, including its basic economic principles.  A war in a region could put strain on its economy and increase the volatility in that region.  This will have a direct impact on the value of its currency.

Inflation

Data related to inflation is indicative of the change in price levels, measured over a specific period.  This is done by taking a basket of services and goods and comparing the changes in price relative to another period of time.  The Consumer Price Index is generally released on a monthly basis, by certain countries.  If the price increases are higher than what was expected, it will more than likely cause a decrease in the value of the country’s currency.

It is vital for traders in this financial market to keep up to date with geopolitical, macro-economic and other economic data announcement related to the country in their currency pair.  These are important indicators of the potential movement in a currency. 

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