Currency rate changes are caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly on pre-scheduled dates, so all traders have access to the same news at the same time.
When a stock market rises in any country, it offers an ideal opportunity for individuals to invest in that country. Therefore investment money flows into that economy and the currency increases in value. When a sock market falls it has the opposite effect putting downward pressure on the currency.
When a country imports more than it exports it has a trade deficit. This causes an net out flow of money putting downward pressure on the currency. When a country lowers its interest rate its currency tends to weaken because low interest rates discourage foreign investment, putting downward pressure on the currency.
Watch the big economic indicators that impact interest rates like the PPI, CPI, Employment and GDP. These indicators have the biggest impact on currencies. When a country steadily raises is interest rates, look for their currency to appreciate against a country that has very low interest rates. When long the country with the higher interest rate you can also earn interest on the difference between the rates.
If a country has to import a lot of oil, like the U.S., as oil prices rise that has a negative effect on a country’s currency. Where as if a country supplies most of its own oil, their currency won’t be as affected by rising oil prices.
The unemployment rate is an important indicator of an economy. If unemployment is rising the currency may be negatively affected.
The strength or weakness of an economy has a direct influence on that country’s currency value. For example when the US economy slow down because of rising unemployment, rising oil and food prices, rising deficit spending, a war and a credit crisis, the FED aggressively lowers interest rates. This hurts the value of the U. S Dollar on the world currency market and the USD drops in price.
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