Forex trading is the buying and selling of different global currencies in a marketplace in which each currency is paired against each other currency
Forex trading is the buying and selling of different global currencies in a marketplace in which each currency is paired against each other currency to deliver a relative value between the two. Forex traders buy and sell currencies to take advantage of the fluctuations in their value to make a profit.
Forex trading has become increasingly popular over recent years with many individuals choosing to invest in the market, as well as financial institutions and global organisations. The ubiquity of the internet and the prevalence of foreign exchange brokers means that it is easier than ever to learn about different currencies and spot opportunities to turn a profit when they arise.
The foreign exchange market is the largest in the world, valued at more than £2 quadrillion and with a daily volume of $6.6 trillion, more than twice the gross domestic product of the whole of the UK. It also sees the most active trading as investors are constantly buying and selling in order to make the most of any changes in the relative values of the currencies against one another.
This means that there are opportunities for private individuals to make money through forex trading. One of the most important aspects of forex trading is keeping track of the various political, economic, and industrial conditions that can have an impact on the value of any particular currency.
Factors that can affect the value of a country’s currency include:
- Interest rates
- Inflation rates
- A country’s economic policies
- Government debt
- Political stability
- Recession
- Export prices
- Terms of trade
Traders need to keep abreast of global news media in order to predict potential fluctuations in the markets, monitoring nations’ economic health and keeping an eye on any potential instability. Traders that use spread betting need to predict which currencies will have a narrow spread between their sell and ask prices in order to capitalise on the lower costs of trading.
The last month in forex trading
The political unrest that has come about as a result of the Russian invasion of the Ukraine has resulted in unprecedented conditions on the global market. Seasonal patterns that have prevailed in previous years have been upended somewhat by the atypical conditions that have had a significant impact on all global markets, particularly crude oil.
The commodities markets have been completely skewed by the breakdown in a number of global supply chains caused by the current policies in place in China. This is having a lasting impact on the price of electronics and other items that, in turn, is impacting trading between some of the major players in the forex market.
The proposed rules concerning the post-Brexit trade agreements between the UK and Northern Ireland have caused ongoing disputes between the European Union and the UK. While the legislation has gone back to parliament’s lower house for a second reading, the European Commission is taking legal proceedings against the UK which could result in a trade war that would have a significant impact on the value of Sterling.
Central banking policies designed to try and limit the impact of soaring inflation could have an impact on the value of the US dollar and it has already seen a minor loss after the Federal Reserve announced a rate increase on June 15. Although there is no intention on the part of the Federal Reserve to bring about a wider slowdown, officials have warned that they will not shy away from fighting inflation, causing concern that a recession may be inevitable.
The euro rose against the dollar when the European Central Bank released its financial statements at the end of June and business confidence data related to Germany’s economy. In Japan, inflation was higher than the Bank of Japan’s target, resulting in a loss for the Yen against the US dollar as investors are thought to have lost confidence in the Japanese monetary policy.
The future of the forex market
Although there have been several periods of unprecedented activity in the forex market caused by unexpected and significant global events, things are settling down and it’s possible to make some predictions about the future of the markets. The EUR/USD market is still the currency pair that is seeing the most trades, followed by GBP/USD and USD/JPY, although there has been a notable increase in trading in USD/CAD and AUD/USD.
Inflation data is likely to be the most useful when it comes to predicting forex market movement, so many traders will be watching closely to see what is happening with countries’ interest rates. Rises in interest tend to boost a currency, whereas falling interest is usually met with a drop-off in the value of their currency, so central banks will be under scrutiny from forex traders looking to get ahead of the markets.
The rapid increase in energy prices has seen the price of consumer goods increasing to their highest level in three decades in a number of the major economic areas. While some central banks are confident that the resulting inflation is only temporary, the market is responding to the expectation that interest rates are likely to continue to rise through the second half of 2022.
As the global economy rallies after a tough couple of years, it is likely that the forex market will regain some stability, assuming that there are no more massive global events that impact the market and cause more fluctuations outside the realm of what could reasonably be predicted.
*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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