The Forex market is one of the largest in the world. It is used and analysed by investors, companies and governments, meaning that it plays a very important role in the economy. But what can the forex market tell us? Are there some things that we could find out with the Forex market?
In this guide, we share some of the most valuable information about the forex market and how this has a large impact on the economy. Moreover, we will learn how to distinguish trends and information depending on the trends that take place in the market.
Disclaimer: the information shared by MavenGrowth and its writers should not be considered financial advice. This is for educational purposes only. We are not responsible for any investment decision you make after reading this post. Never invest more than what you are able to lose. Always contact your professional financial advisor.
What Can the Forex Market Tell Us?
We already know that the forex market is among the most traded ones in the world every single day. This is because it has a large impact on different economic and social aspects. Countries are heavily impacted by international markets and the forex market is definitely a key industry to follow.
But what can the forex market tell us? Many things, from central bank intervention in the economy, to central bank interest rates and they can also give us information about the balance of payments.
Central Bank Intervention
Central banks have a large impact on the forex market. They could even define the price of a currency against others. This is something that shows there is a strong involvement of the central bank in the economy and in the forex market.
If we see that there is a country with fixed interest rates, then we should carefully follow this situation. This could tell us that there are some issues linked to how the free market works and that the country could be affected by some economic imbalances.
The free market would solve this situation, however, governments try doing everything they are able to reduce the negative impact of their decisions, creating larger imbalances and problems in the economy.
Furthermore, when analysing the forex market, we should also pay attention to some patterns. Some countries have exchange rates that move in a specific direction (higher or lower) depending on what the government decides. This is something that should be closely followed as it could end up creating a situation in which forex prices would be far from real market prices.
Interest Rates
When we analyse the forex market, we also see whether a currency is experiencing devaluations and revaluations. This could happen due to different reasons, but central banks usually take action by managing interest rates.
At the same time, interest rates would also have an impact on the real economy. Lower interest rates stimulate credit and economic activity, while also devaluing the currency of a country. Meanwhile, higher interest rates reduce the economic stimulus and have a positive impact on the currency of a country (it gains value).
Thus, interest rates have a clear impact on the Forex market. Depending on the need of each country, central banks could raise or lower interest rates. Before investing in forex trading pairs, it is very important to understand whether the local central bank is expected to raise or lower interest rates. Everything would depend on the economic situation of the country, the goal of the central bank and many other things that are analysed by experts at the state level.
Balance of Payments
Finally, the balance of payments has also a large impact on the forex market. Indeed, the forex market is able to tell us whether there is some type of balance of payment imbalance. The balance of payments includes all the transactions that take place between one country and the rest of the world.
That means that if you buy something in foreign currency, you are negatively impacting the balance of payments. Instead, if you sell things abroad and get paid in foreign currency, then you are having a positive impact on the balance of payments.
When the balance of payments shows that there are more things purchased from abroad than sold, then the forex market would show that a currency is devaluating. Instead, if there are more things sold to other countries, the currency would be strengthened. This is how the forex market can tell us about the balance of payments.