What Causes The Forex Market To Move?

In Summary:

  • The forex market covers the global exchange of currencies and is open 24 hours a day, 5 days a week
  • Currency values move according to session timing, economic events, and force-majeure anomalies

How The Forex Market Moves Each Day: Market Sessions

From Monday to Friday, the global forex market doesn’t sleep. Indeed, the long opening hours set it apart from trading stocks or commodities, where trading is packed into frantic daily sessions. However, forex trading is not consistent through this five day period; instead, markets cycle and fluctuate markets across the globe open and close and different currencies dominate. 

For this reason, traders commonly break each 24 hour period into sessions according to which markets are open. The four sessions are referred to as the Sydney, Tokyo, London, and New York sessions, but they do of course overlap. 

As shown above, currencies are most active during their respective regional trading hours. In general, the most active forex period is where the majority of major pairs are found: when the London and New York periods overlap. On the other hand, the London session is generally the busiest because it also overlaps with both the Asian and American sessions. 

Although major, liquid currencies, such as USD, are likely to be active 24 hours a day, exotic currencies will have far less demand and liquidity outside of their regional session. For this reason, it is important that traders learn to match their trading strategy and timing to their assets of interest. 

Understanding Why the Market Moves: Fundamental Analysis

Beneath the daily and regional fluctuations, there are broader factors at work on the forex market. Just as traders will analyse company performance before investing in stocks, forex traders will consider the respective strengths of economies before trading on a currency pair. This is where fundamental analysis comes into play. 

Fundamental analysis takes into consideration economic data that affect currencies in order to understand and forecast price movement. Interest rates, employment figures, GDP, international trade, consumer spending, inflation, and manufacturing are just some of the fundamentals that influence currency strength.  

Overall, fundamental analysis is based on three principles: 

  1. Price moves for a reason – price movement and fluctuation is not random because fundamental forces are moving the markets. 
  2. Market reaction is predictable – it tends to respond in a consistent manner to these fundamentals, so it is possible to predict future movements. For example, central bank interest rate rises will typically strengthen the currency concerned. 
  3. It is impossible to predict all fundamentals – analysts can forecast economic data, but never with 100% accuracy. Other geopolitical factors, such as natural disaster or a worldwide pandemic, are entirely unpredictable.

Forex Market Fundamentals

We can split the fundamentals of the forex market into three broad categories: economic, political, and force majeure. 

Economic

Economic reports are issued routinely by every nation and allow traders to monitor the macroeconomic indicators listed above in some detail. Obviously, traders ought to analyse both currencies of their forex pair in order to understand their balance of strength at any moment in time. 

Although nothing is ever guaranteed in economics, you can see the general relationship between fundamentals and currency health as follows: 

As shown, the strength of an economy directly correlates with the strength of the currency. This is because a strong economy attracts international investment, whilst stagnating economies will become less attractive. 

Reading Forex Fundamentals

Politics

Traders have to take into account more than just economic indicators when studying price fundamentals. Political events, such as local or national elections, trade policy changes, and international conflict can all influence currency strength. Volatility tends to climb during times of political uncertainty and rumours such as tightly-contested elections and referenda; meanwhile, stability and pro-business policies usually foster positive currency growth. 

Force Majeure

Force majeure events can cause unexpected destabilization for currencies. Political revolutions, collapses, or natural disasters that disrupt normal economic activity can cause severe volatility in the short term. Moreover, the speed and strength of a currency’s recovery will depend on the impact of the event in question and can cause long-term depression in less developed economies. 

Keeping An Economic Calendar

An economic calendar is a useful tool for traders looking to stay abreast of data from across the globe. Listing key announcements, central bank meetings, and economic report publications, it provides a comprehensive insight into the upcoming events likely to influence the forex market. economic calendars can be found online, and traders can then filter out the events that are most suited to their currency pairs. 

The calendar is more than just a list of dates and offers the following information: 

  • Date, time, and region of publication or event 
  • Currency asset in question
  • Level of importance in the markets, or level of volatility expected 
  • Previous, actual, and forecasted results 

Trading The News

Armed with the above information (alongside technical analysis), traders can position their entries and exits according to anticipated price movement. Prominent events, such as Federal Reserve announcements, can produce especially volatile trading conditions. This is due to the volume of traders looking to enter the markets simultaneously. Beginners should bear this in mind and consider using pending orders (stop losses and take profits) to contain risk in case of sudden price changes. 

When it comes to trading the news, timing is everything. The mantra “buy the rumour, sell the news” recurs frequently in the forex world; markets will often move in anticipation of an event, and not as it occurs. This is why forecasted numbers are useful for planning trades, because market sentiment can move long before the news actually breaks. In some cases, forecasted values will differ so greatly from actual figures that sentiment will change dramatically and fuel extra volatility.  

Summary

The forex market is open nonstop from Monday to Friday and plenty of action features during that period. Traders need to understand market cycles and current economic trends in order to time their orders effectively. Once traders understand the daily flow of currency sessions, an economic calendar can provide particular periods of interest each week. Nonetheless, there is such a thing as information overload. Traders, especially beginners, don’t have to get bogged down in every economic release. It’s important to keep an eye on the bigger picture with fundamentals and weigh short-term shocks against longer-term trends. Remember, nothing is ever set in stone! 

FAQ

What Are The Different Forex Market Sessions?
Which Is The Busiest Forex Market Session?
What Are The Three Main Principles of Forex Fundamentals?

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