The economic context of a country influences the appreciation or depreciation of the currency in the Forex market. In principle, a country with good economic growth and increasing consumption of households implies a stable or appreciating currency. On the other hand, the currency depreciates in economically unstable countries or experiencing an economic crisis. Impact of economic and financial policies on currencies The United States and Germany are the major economic powers with strong currencies (dollar, euro). In some countries, however, economic growth is not enough to support the currency, especially if the parallel debt ratio is high.
The unfavorable currency settings in times of economic growth
Even in case of strong economic activity, a highly indebted country does not attract investors, so the value of its currency may drop. Policy interest rate may also influence on economic growth.
Indeed, when a currency is strong, it is less competitive for export. Also, governments intervene through rates to decrease the value of the currency.
In 2010, Europe was hit by a major economic crisis resulting from the Greece's debt position. Financially, this is negatively affected the euro which depreciated sharply.
The fall of the euro in the Forex market due to the economic crisis is due to government intervention in the interest rate and the behavior of investors within the Forex market. Governments intervene in the interest rate in order to maintain the competitiveness of the currency export.
As for investors, they buy stronger currencies at the expense of weaker currencies. Weak currencies therefore continue to lose value. Thus the actions of investors will generally strengthen the trend of currency variation, either upward or downward.
Economic data to consider
To assess the economic situation of a country, there are many numerical or statistical data.
Some are particularly influential in the forex market, such as indicators on the employment situation, the purchasing power of consumers or the state of a country's trade balance.
Impact of imports and exports of a country's local currency
The trade balance shows the relationship between imports and exports of a country. When a country exports more than it imports, the trade balance is in surplus and vice versa.
Theoretically a positive trade balance is favorable for the local currency; however, a trade balance deficit devalues the currency.
A trade surplus thus reflects a healthy economy because local companies generate export revenues and increase their sales.
When the trade balance is in deficit, a country must buy foreign currency, selling its own currency, which causes impairment thereof.
The effects of purchasing power in the Forex market
The purchasing power of consumers in a country also influences the currency. To interpret the effects of the purchasing power of currency values, you must compare the purchasing power of another country.
This parity of purchasing power can predict and understand the variation of a currency pair. The system is used to compare the price of a shopping cart identical in both countries.
The price increase indicates inflation, loss of purchasing power and therefore generally leads to a depreciation of the currency.
The influence of employment in the Forex market
There is a correlation between certain currencies, especially between the dollar and the euro and the dollar and the pound sterling. The employment situation in the United States can thus act both on the dollar than on the euro.
The unemployment rate is provided monthly has significant impact on the currency. A drop in the unemployment rate leads to an increase in purchasing power, increased consumption and therefore a good economic growth, which supports the local currency.
In contrast, job losses or the closure of several factories and companies lead to lower production and local consumption which invariably causes a depreciation of the currency.
All traders should have a thorough knowledge of all the above mentioned elements to be in the position to feel the market and by following the trend make the right and profitable decisions that will lead them to success.
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