Struggling to think of something to bet on while the football season takes a break? Have you ever considered Forex?
If you attempt to make a profit by speculating on the currency exchanges – whether by conventional forex trading or the relatively recent phenomenon of spread betting – it may sometimes seem as if those exchanges have a will of their own. Even the terms in which they are discussed lend fuel to this line of reasoning, with seasoned commentators speaking of the markets ‘reacting nervously’ or ‘responding well’ as if a collection of literally millions of individuals taking part in a global, decentralised market could be treated as a unified organism with a single ‘point of view’.
Struggling to think of something to bet on while the football season takes a break? Have you ever considered Forex?
If you attempt to make a profit by speculating on the currency exchanges – whether by conventional forex trading or the relatively recent phenomenon of spread betting – it may sometimes seem as if those exchanges have a will of their own. Even the terms in which they are discussed lend fuel to this line of reasoning, with seasoned commentators speaking of the markets ‘reacting nervously’ or ‘responding well’ as if a collection of literally millions of individuals taking part in a global, decentralised market could be treated as a unified organism with a single ‘point of view’.
The truth is that currency exchanges, and the rates which one currency can be converted to another, fluctuate more or less constantly as a result of various external factors. It is for this reason that the strength of a national currency has traditionally been regarded as a barometer of the overall economic health of that country. Any successful ‘playing’ of the currency markets involves being able to recognise what those external factors might be, and successfully second guessing the effect they are going to have on a currency.
Inflation
The inflation rate in a country can have a direct impact on the strength of its currency. A lower inflation rate means the price of goods and services increasing at a slower pace, something which generally sees its currency becoming stronger, particularly in comparison with the currency of a country with a higher inflation rate. This is particular the case when consistently high inflation prompts the government or central bank of a country to raise interest rates.
Interest Rates
One of the reasons for raising interest rates is that it tends to push the value of a currency higher. This is because the advantageous rates given to savers encourage more foreign capital to flood into the country, and this pushes up demand for the currency and thus its value on the currency exchanges.
Balance of Payments
If a country spends more on imports than it brings in through exports then it will often have to borrow from foreign sources to make up the difference. The lack of genuine investment coming into the country will generally result in the currency falling in value.
Deficit
A large deficit, which means a government servicing a sizeable debt, makes it less likely that foreign investors will want to put funds into that country. This is prompted by a fear of default on the debt and leads to foreign investors selling bonds in a particular currency. As with many of these factors, the size of government debt has an effect in tandem with interest rates and inflation, all of which feed into each other to create a general trend up or down.
Political Stability
The impact of political events on the currency exchanges has become more noticeable than ever in recent years, perhaps as a result of those events seeming less predictable than was the case. This, in particular, relates to the vote for Brexit and the election of President Trump, which hit the value of the pound and the dollar respectively.
Whilst the dollar recovered relatively quickly, reflecting its historical stability, the pound has yet to claw back the majority of the value if lost in June 2016. The recent UK election, which again proved that making political predictions is something of a fool’s errand, merely added to this sense of instability and, as Europe is seen to stabilise and move away from populist political solutions, so the uncertainty surrounding the UK political scene will continue to impact upon the pound.
The art of successfully trading in the currency exchanges is the art of accurately predicting the impact which any of the factors listed above could have on the value of a currency. It should also be noted that the volatility introduced into the system by large scale events such as the Brexit referendum ultimately creates an atmosphere in which smaller events can lead to sudden but short lived fluctuations.
Thus, events such as court decisions, parliamentary votes and the announcement of a forthcoming election have all impacted upon the strength of the pound in recent months, but the level has soon returned to something akin to the longer term norm. Spotting and trading upon such passing occurrences seems set to become the key to successful forex trading.
