Conditions That Affect Forex Trading

There are certain conditions in the economy that can affect forex trading. The conditions may arise from such areas that may include the economic policy being disseminated by government agencies and central banks. Economic conditions may also be generally revealed through periodic economic reports as well as by other economic indicators.

Economic policy consists of the government's fiscal policy or its budget planning and spending practices. Also part of the economic policy is the government's means of influencing the supply and exchange rate of its currency through the actions of the central bank. This policy can further be reflected by the level of interest rates predominant in the country. Other economic conditions that affect the forex market include:

Government budget deficits or surpluses. When the government is experiencing a widely increasing budget deficit, the forex market usually reacts negatively to it while the narrowing of budget deficits has a positive effect. This will eventually have an impact on changes in the value of a country's currency.

Balance of trade levels and trends. The trade flow between two countries can effectively determine the demand for goods and services between the two. This, in turn, will have an impact on the demand for a country's currency to conduct trade. Surpluses and deficits in the trade of goods and services show the competitiveness of a nation's economy, with trade deficits being a negative indicator while trade surplus being the opposite.

Economic growth and health. This is a major factor that affects exchange rates of a certain currency. Health and growth in a country's economy is indicated in reports such as the country's gross domestic product (GDP), employment levels, consumer spending, etc. These indicators measure the levels of a country's economic growth and health. In generally, the healthier and more stable a country's economy is, the better its currency exchange rate will be. This will further lead to more demand for it in the world forex market.

Political conditions. The political state of a country also plays a big part in its currency's foreign exchange. This also is true to the international political climate. Whether it be in the local, regional, or in the international scene, political conditions serve as an important indicator to certain changes in the foreign exchange markets. Serious and sensitive political events around the world can have a profound effect on global currency markets. Not only would it affect forex trading in a certain country, but political event may also affect neighboring countries in a positive or a negative way