Five Economic Driving Forces that Influence Forex Trading
Forex trading refers to the practice of buying and selling foreign currencies as they rise and fall in value on the global currency market. Instead of investing in the success of companies, one is investing in the success of the currencies of nations of the world, which is to say that one is investing in the success of the nations themselves. Of course, the economic success is the most important piece in this puzzle, but the economic success of a country is dependent upon a whole lot of things. Here are just the five biggest ones.
The first one is the Gross Domestic Product or GDP of a nation. This concept is not a new one; every American had to do reports at some point during their education that included the GDP of a nation or a region of nations. However, the way that the GDP works might not be as obvious as what the initials of GDP stand for. The GDP affects the strength of a nation’s currency by weakening or strengthening the net production of the country. Regardless of percentage of import and export, the GDP represents the power of the workers’ force of a nation, which is indicative of the working ethic of the inhabitants and the strength of their working power.
Another easily graspable driving force of a nation’s Forex trading power is simply what the current events are in the nation in question. This may seem like an odd factor to influence currency values, but actually it’s perfectly logical that this be an influencing factor for a currency’s value. On a large-scale level, take the devastation of Hurricane Katrina, which obviously affected the US’s currency. However, there does not need to be huge ‘events’ in order to influence Forex trading. A currency’s value is closely linked to the overarching state of affairs in the country of question.
The third factor when it comes to analyzing the value of national currencies is the industrial production report of the nation. This may sound like a repeat of the GDP; the two are actually quite different. While the GDP measures the amount of production, the industrial production report measures the efficiency of what is being produced and included in the GDP. A country that is more efficient will have a better rating on this factor than a country that is not very efficient.
The fourth factor is the consumer price index. The basic idea behind this notion is to find out whether a country is making or losing money with what they are producing. This is a quite logical one; if the country is making money, their rating will be good for Forex. In addition to the cut and dry notion of making or losing money, of course a nation who is making more money on products will score better than a country who is making money, but only a very slight profit margin.
The last of the top five factors is the retail sales report. This report samples retail across a nation in a variety of domains for purchasing. The idea behind this is to find out what people are spending their money on and just how much they are spending. This samples the economic fortitude of the people who make up the nation in question. If you take an event like September 11th, this example shows that the general spending culture changes in this sort of event. While the GDP may not change and the industrial production efficiency might change only very slightly, retail sales plummet. Go beyond the word ‘retail’--think of automobile sales and plane tickets; these too are part of the retail spending of the nation’s inhabitants.
These five factors together provide a very clear idea of just how a currency is doing by taking a look at these factors in the country whose currency one is considering.