The forex market, or any other financial market, is always driven by sentiment. And by sentiment, we mean; investors will only pay what they believe an asset is worth. More so, their investment decisions are primarily ‘future-looking,’ meaning that the types of trades they make will reflect their expectations about the value of the asset they trade.
So, what drives the price of currency pairs in the forex market?
The simplest answer is the fundamentals of a country. Let’s revisit the forex basics here for a bit. The price of a currency pair is the exchange rate between two currencies. This price doesn’t just move up and down arbitrarily. It is determined by the economic value of either country – what is called fundamentals. You might be tempted to think that technical indicators drive price action in forex. Quite the opposite – almost all the time, the technical indicator follows the news.
So, when one country’s fundamentals improve or are believed to improve, the value of its currency will increase relative to other currencies. Similarly, when the country’s fundamentals deteriorate or are expected to worsen, the currency will depreciate.
Remember the laws of demand and supply. When the demand is high, prices tend to go up, and when demand falls, prices fall along with it. The same applies to the forex market. When fundamentals improve or are expected to improve, the currency is in high demand making its value increase. When fundamentals worsen or are expected to, traders dump the currency as its value drops.
So, how do forex traders know if the fundamentals of the country have improved or worsened? News! News, as always, is the carrier of everything.
Where to find News in the Forex Market?
In the forex market, news can be delivered in various ways. There are hundreds, if not thousands, of organizations and government agencies that publish various economic indicators. But don’t worry, you won’t have to go through thousands of webpages just to find relevant news regarding the currency pairs you are trading. Things are a bit neat in the forex market when it comes to news releases. The economic calendar simplifies things for you. Here, you will find virtually every scheduled publication of economic indicators from every country! This way, you get to know what’s happening and when it is happening.
Here’s a screengrab of an economic calendar.
Furthermore, these scheduled releases have been categorized depending on the magnitude of their impact. Of course, not all economic indicators impact a currency the same way. Some have negligible effects.[wp_quiz id=”94071″]